Is using money from my Roth IRA as a down payment for a house the same as swapping my investment for real estate investment?
I am 63 years old, currently married, and have about $150,000 in my Roth IRA. I want to buy my own house, so I propose using at most $100,000 from my Roth IRA for a down payment. Wouldn't that be like swapping stock investment for real estate investment?
Depends on how you look at it. Buying a home is kind like an investment. You dutifully put money each month to build up an equity and hope to sell it someday to reap the benefit of a high price and the equity for retirement or other purposes. However, most people don’t treat home as an investment; otherwise, they would be disappointed to learn there’s no cash flow derived from such an activity.
If owning a home gives you the pleasure and pride of owning a piece of real estate and do whatever you please (decorating, gardening, etc.) without any restrictions, then it may be worth the effort to swap a portion of Roth for home. On the other hand, if you simply just want to expand your traditional method of investment, I’m hesitating to recommend replacing a majority of stocks/bonds for a real estate. You definitely need to discuss further with your advisor. Best!
The short answer is no, the two are not the same. First, investing in a home is not always a good investment, it may or may not go up in value. There are also costs of ownership and sale that need to be taken into account as part of the cost. In addition, you are personally consuming this investment which makes it different than an investment held for the sole purpose of investing.
There are also major tax differences in a Roth IRA and an investment in your home. You are probably aware that the Roth IRA earnings are tax-free both state and federal when you remove them. The Roth is not subject to RMD rules making it more attractive. The sale of a home is exempt as to federal tax for the first $250,000 in gain, $500,000 if you own it jointly. State tax laws vary, many do not exclude the same amount as the IRS does for federal taxes.
Buying a home may be more important to you than the tax consequences, is your area experiencing increases in home prices? Will this provide you stability in your living situation? Do you need protection from rising rents in your area?
You do not say if you have other alternatives to providing the down payment for your home, or what other sources for retirement income that you have.
If you do have personal investments or cash, utilizing them for your downpayment might be a better way to come up with the money. Then keep your Roth IRA intact for your retirement income use. A mortgage is a good idea since rates are historically low which makes a mortgage more desirable.
Good question! I have a number of questions that would need to be answered before generally coming to a solution for you:
1- Are you currently retired?
2- Do you have sufficient retirement assets outside of this Roth IRA you can use for income?
3- Have you recently reviewed your social security statement? and you spouses?
It would be fairly simple to have a discussion to get this information to better understand how the pulling the 100k affects the bigger picture. If you'd like to schedule a no-cost, no-obligation consultation, you can do so by following this link: https://calendly.com/jcjones/investopedia
Hope to hear from you!
It's difficult to estimate to what extent buying a home represents an investment or a consumer expenditure. However don't kid yourself, withdrawing a substantial percentage of your Roth IRA to use as a downpayment on a home is not the same as swapping stock for investment real estate.
Within your IRA, selling shares of SPY to buy shares of SCHH is a better example of swapping stock for investment real estate.
Nothing wrong with wanting to own a home, and it may well be a good move, but keep it real!