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But because traditional IRA contributions are made pretax, you’ll owe income taxes on distributions, even when you only withdraw the amount you contributed. It’s important to understand the rules for using your Roth IRA to buy a home. It’s also important to consider other factors, such as how a withdrawal will affect your retirement goals. In this article, you’ll learn how to use your Roth IRA money toward a first-time home purchase, as well as the pros and cons of doing so.
Robin Hartill is a Certified Financial Planner who writes about money management, investing, and retirement planning. She has written and edited personal finance content since 2016. Robin currently leads The Penny Hoarder's personal finance advice column, "Dear Penny." Through this platform, Robin answers the questions of readers from across the United States.
Should You Use Your Roth IRA for Buying a Home?
We are an independent, advertising-supported comparison service. "These accounts are designed to help people accumulate as much money as possible for retirement," said CFP Shon Anderson, president of Anderson Financial Strategies in Dayton, Ohio. At the same time, the cost of borrowing is relatively cheap due to low interest rates. The average rate on a conventional 30-year mortgage is about 3%, according to Bankrate.com.
You use the funds toward purchasing a home within 120 days of receiving the distribution. You and your spouse are first-time homebuyers (the IRS defines this as someone who hasn’t owned a principal residence in the past two years). The bottom line is that using IRA money for a home purchase may not make sense for everyone and serious consideration should be given to both the pros and cons before making such a move.
Can I use my Roth IRA for closing costs?
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Also, if the purchase is cancelled or delayed, the one-rollover-per-year rule does not apply. The definition of “first-time home buyer” for purposes of this exception may not be what you expect. A first-time home buyer is someone who has not owned a home for the past two years. If you owned a home, but you sold it five years ago, you would qualify. The first-time home buyer may be the IRA owner, but certain family members can qualify as well.
How Will Your Retirement Goals Be Impacted?
Even though you'll avoid the 10% early withdrawal penalty on the money, you'll still owe income tax on any amount you withdraw. But if you’ve had the Roth IRA for at least five years, the withdrawn earnings are both tax- and penalty-free as long as you use them to buy, build, or rebuild a home. By meeting the exception, it only means you are not subject to the “additional 10% tax.” You still are subject to paying tax on the distribution. First of all, if you make a tax-deductible contribution to a traditional individual retirement account, or IRA, you will be taxed later on, when you take out distributions.
The same qualifying exemption for using Roth IRA funds to buy a house also applies to using traditional IRA funds, but the withdrawal penalties and restrictions differ. The amount any individual can withdraw penalty-free from Roth IRA funds to purchase a home is limited to $10,000 per individual (thus $20,000 if your spouse also withdraws from their IRA). If you’re unemployed but you’re making medical insurance premium payments, you can withdraw money early from your Roth IRA without penalty.
Limits on Roth IRA contributions based on modified AGI
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. "You can obtain a loan for a home, car, business venture, college tuition ... but no one will ever receive a loan to retire," Anderson said. As home prices continue rising amid a tight housing market, the amount of cash needed to purchase one is climbing, as well. The IRS doesn't allow you to use an IRA as collateral for a loan.
Once you’ve got enough saved up, it’s time to buy your home. If your first contribution was at least five years ago, you’re good to withdraw an unlimited amount of contributions and up to $10,000 of earnings tax and penalty-free. You’ll typically owe taxes and a 10% early withdrawal penalty if you withdraw your Roth IRA earnings before reaching age 59 ½. Regardless of your age, withdrawals will be taxed if you’ve had your Roth IRA for less than five years, unless you qualify for an exception. You can withdraw up to $10,000 of earnings while avoiding taxes and fees if you’re using the funds for a first-time home purchase.
You can also use the money for a child, grandchild or parent who satisfies the first-time homebuyer definition. With some restrictions, you can take money from your Roth IRA to buy a home. We believe everyone should be able to make financial decisions with confidence.
Even if you are under age 59½, you don't have to pay the 10% additional tax on up to $10,000 of distributions you receive to buy, build, or rebuild a first home. To qualify for treatment as a first-time homebuyer distribution, the distribution must meet all the following requirements. A Roth IRA is a special individual retirement account in which you pay taxes on contributions, and then all future withdrawals are tax-free. When you've exhausted your contributions, you can withdraw up to $10,000 of the account’s earnings or money converted from another account without paying a 10% penalty for a first-time home purchase. You won't get to use the first-time homebuyer provision again to buy a home, even if you use a different IRA.
Above those income amounts, the contribution limit is reduced until completely phasing out at income of $140,000 for single tax filers and $208,000 for joint filers. The quick answer is yes, you can have both a 401 and an individual retirement account at the same time. These plans share similarities in that they offer the opportunity for tax-deferred savings (and, in the case of the Roth 401 or Roth IRA, tax-free earnings).
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