Should I consider buying a house and using money from my Roth IRA as a down payment?
I am a 26-year-old working full-time with a Roth IRA that sits at about $18,000. I am currently spending about $800 a month in rent and have been considering using the exception to make a withdrawal for a house down payment. I feel like I am throwing away the money every month by renting when I could be getting a return on it, and based on some early research I could find a reasonable house in my area and keep the mortgage payment amount roughly the same as the rent. I have my student loans paid a couple years ahead and pay off my credit cards every month. Should I consider buying a house and using money from my Roth IRA as a down payment?
Thank you for your question. I have two key thoughts. First, it seems counter-intuitive to save for retirement, then use the money for another purpose. I realize such things are allowed, but really, what is your comittment to saving for retirement? It must be firm. And you ARE hopefully getting a return on this money, tax-advantaged besides, while it is in the Roth IRA. It also seems like you may not have an emergency fund or any other savings. Both of those should be priorities before going into debt and additional unknown expenses with home ownership. You should have at least six months expenses in an emergency fund, then save for a downpayment on a house.
Second, do not feel that you are "throwing away" rent money. It costs money to live under all circumstances and that money is gone forever. If you own a house, especially with a minimal downpayment, you will be throwing away money on interest each month. And, there are additional expenses of owning a house beyond the mortgage payment. Taxes, insurance and maintenance are significant costs that are not recovered. Maintenance costs simply preserve, and add nothing, to a house's value. Also, your estimated $800 mortgage payment seems very low as if it might not include property taxes, insurance, or the Private Mortgage Insurance that would be required with less than 20% downpayment. If an all-inclusive payment is really that low, then I would question the condition of any house that you could buy for that amount and what the likely maintenance and repair bills will be like. I do not see a person's residence as an investment. An investment is something, like a mutual fund, that can be easily liquidated to harvest returns or curb your losses. A house is a place to live and cannot be easily liquidated. Even if you experience appreciation in a rising market, and you sold it "at a profit," you would still need to buy another at the same appreciated values just to have a place to live.
I stronly suggest that you contimue to rent until you have an emergency fund in place and a downpayment saved, so as to leave your Roth IRA, which really is an investment, intact and hopefully add to it. Take great comfort in knowing, month to month, exactly how much it will cost you for housing. Defer home ownership until you have the financial flexibility to better meet unexpected expenses in addition to routine maintenance which can easily run up to 4% of the value of the home. That's an average of about $333 per month for every $100,000 in home value.
I wish you well.
Dear 26 year old,
You are a working full time professional with Roth IRA valued at $18,000 interested in purchasing your first home with the use of one time IRA exception where your estimated mortgage payment will be roughly the same as your rent, where you have student loans paid off ahead and credit card debt completely paid off.
I wish to honor and congratulate you for managing your mind, your assets and debts professionally. The first word that grabbed me when you spoke about the purchase of a home was the word "reasonable". It appears all your actions have been reasonable and will continue to be reasonable as you progress in life.
WITHDRAWING MONIES FROM ROTH IRA FOR PRIMARY RESIDENCE PURCHASE (EXCEPTION)
Traditionally IRA accounts have restrictions against withdrawal of funds set by Internal Revenue Service until age 59½ and beyond with a penalty charge of 10% on any amount withdrawn, along with income tax.
Exceptions do exist! You may withdraw a sum equal to CONTRIBUTIONS you’ve made to a Roth IRA tax-free and penalty-free at any time, for any reason (because you’ve already paid taxes on the contributions).
Once you exhaust contributions to the ROTH IRA which you state is a total of $18,000, you can withdraw up to $10,000 of ROTH IRA account's INVESTMENT EARNINGS without paying a 10% penalty for a first-time home purchase where funds are utilized for the purpose of "acquiring" a principal residence.
Note, if the Roth IRA has been in existence less than five years, you owe income tax on earnings. If you’ve had the Roth IRA for at least five years, withdrawn earnings are tax-free, as well as being penalty-free.
OPTION: TAX FREE ROLLOVER FROM ROTH IRA
You may consider doing a rollover from IRA ACCOUNT with goal to obtain best loan terms as long as within 60 days after withdrawal of monies you put money back into the ROTH IRA to avoid penalties/taxes.
Carefully consider where your money will work harder, tied up in home ownership, or invested through your Roth IRA account. Ownership of a home and the valuation of home ownership is based on many variables one of key significance is location, location, location. Ownership has benefits- "my home- my castle". The interest rate environment is still approximately 4%. Average annualized return for conservate investment return in the stock market is 10%. You must decide best to never as you say "throw money away"!
FOCUS ON LONG TERM PLANNING
Because you are 26 years old (blessed) and not 56 at the time of the distribution for a home purchase, tapping into the ROTH IRA account though causing you to loose on tax free growth of funds that make the ROTH IRA a powerful investment retirement account, you have plentiful time remaining (26 years old) to get back on track immediately and not loose the momentum of the journey to fund your retirement fund.
BE EMPOWERED- GAIN FINANCIAL CLARITY -DAILY FOCUS
Whether you should or shouldn't use your retirement account to buy a house is something you should discuss with an accountant or a tax attorney, or even a financial adviser. In the end, you be educated, enlightened and advised. There are some things about owning a home that has nothing to do with money however the purchase of a home in an appreciating market will benefit you long term.
All the very best to you!
Jan Attard, MBA, RIA, Wealth Management Specialist
Technical & Fundamental Market Analysis
J. Oliver Maxwell, LLC
First of all, it’s great that you’ve been able to make significant contributions to your Roth IRA at this stage in your financial life. You’re putting your money to work by giving it ample time to grow in your account. It’s essential to remember that while you can take out a loan for a home, you can’t take out a loan for your retirement. With this in mind, it may not make sense for you to pull funds from your IRA, as you will definitely need this money in your retirement more than you need a home now.
Additionally, buying a home isn’t a decision to make quickly. Before you decide to purchase a home, make sure that you’re first in a place that you can envision yourself living for at least five years and that you’ve given careful consideration as to how your home fits into your financial plans and investing strategy. For many people, renting allows for much more financial freedom over time. Additionally, rent should not be viewed as “throwing away money” as it’s money going towards your wellbeing and basic living expenses (like food or water).
When you are ready to purchase a home, there are many additional expenses that extend beyond the cost of your monthly rent. For starters, you must make sure you have enough cash for the down payment. Twenty percent is a good amount to put down - anything lower and you will have to pay for private mortgage insurance (PMI). Generally, a good rule of thumb is to make sure you don't spend more than 28 percent of your gross income on housing in any given month, but keep in mind that monthly payments encompass more than just the mortgage — they also include interest, property taxes and insurance on the home.