Financial Planning for Generation X & Y Women
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Expert Q&A Archive

Can I use my Roth IRA as a downpayment for my first home?
I would like answers to some questions about getting on a budget and also what to do with my Roth IRA. I opened up a Roth IRA 3 years ago. It sits in an account that has almost 0% interest. It's approx 15K at this point, and I still have to put in my 5K for ’08. Hence it will be 20K. I was wondering if I can use my Roth IRA as a down payment for my first home?
Virginia Clay CFA:
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When you take a distribution from a Roth, if the value of the Roth is equal to or less than the total contributions, then there is no tax consequence. The part of your distribution that is over the amount contributed will be taxed, and a 10% penalty, assessed, unless you take a "qualified first-time homebuyer distribution." Then you do not pay the 10% penalty.

To meet the qualified homebuyer distribution request it must be for a principal residence for you or a family member (which the IRS defines) and you or that family member cannot have owned a home in the previous two years (the definition of the first-time homebuyer, in this case). The maximum amount of the withdrawal is $10,000, so you cannot use the full account value for the homebuyer distribution. There is also a time limit you must meet. If you take the distribution, you must use the distribution to pay "qualified acquisition costs” within a 120-day period.
Jeff Kyle:
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Great question. Yes you can use your ROTH IRA penalty free towards a first home purchase. I don't know where you currently have the monies, but generally that low of [an] interest [rate] indicates one of two things: it's either tied to the market, and you're lucky it's 0% instead of -40%, or it's in a fixed account that has high liquidity (you have 100% access to the money at any time). I can't advise you as to where to put your money without knowing what you want to accomplish (as an alternative to utilizing it to purchase a home). As far as finding a financial advisor to work with, I recommend you find a local NAIFA (National Association of Insurance & Financial Advisors) chapter, and you will find a quality advisor there to work with who doesn't care how much or little you have. Their motivation will be your success. Respectfully, Jeff
Bettye J. Banks:
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Patience is a virtue! Don't be too quick to despair because of the lack of growth of your Roth fund. These things are cyclical, and they will turn around over time. At least you haven't lost principal, and at this point, that is a positive thing!

You probably can use your Roth IRA as a down payment for your first home. Check with your investment professional about using your Roth to fund your down payment. With a very good market to buy a house, consider it an investment.

Do you have a financial planner who handles your 401(K) at work? The company representative who works with you might give you some insight about where to start.

As to getting on a budget, I strongly suggest a traditional credit counseling agency like Consumer Credit Counseling Service. They have a 50-year history of credibility and are members of the National Foundation for Credit Counseling. Call 800-388-CCCS (2227) to locate a service convenient to you. Most, if not all, of these services offer some type of financial wellness education free or at a very low cost.
Michael A. Masiello:
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Happy to answer this and any other questions you have on your Roth. Based on your age, you should continue contributing and look for a diversified Large Growth fund. Lots to choose from that over time will be fine.

Remember, retirement is long term, and for you 30 plus years away. Don't get panicked by current conditions. Thanks, Mike.

Rosemary Ervin, CPA:
expert info »
Yes, up to $10,000 of the money in the ROTH can be distributed without penalty for a first home, so long as you have not owned a home in the past two years.

ROTH distributions carry penalty and income tax, but since your tax deferred earnings are minimal, there should be little tax consequence. A ROTH IRA is for your retirement. Do not confuse it with your personal investing. You should have a separate account to accumulate cash for the house down payment.

You should wait until the ROTH is open five years before requesting the distribution. Making the 2008 contribution will enhance the ROTH balance, but it will not be available for the home purchase, as the distribution from ROTH for first time home purchase is limited to
$10,000. If you intend to purchase your first home in the short term, say 1-2 years, then keep the ROTH balance in cash or a CD, minimal interest. Do not make the 2008 contribution. Simply invest the amount in a regular money market or CD, depending on when you will need the down

You can open a ROTH at a local bank and contribute a minimal amount each month. Granted, it will only earn money market rates, but it will grow, and you have about 30 years. There will be plenty of time to invest more aggressively after you are settled in a home and have a more
substantial balance in your retirement account.
Lynn Anne Gillen, CIMA® :
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Yes, you can use your Roth as a down payment for your first home—though the Roth IRA needs to be at least 5 years old to take out the profits on the account without penalty. Contributions to a Roth can be taken out without penalty at any time.

If you decide not to use your Roth for a down payment--you should move your Roth into some mutual funds that will pay more than .5% interest--someone at the bank or institution where you have your IRA will be able to help you.

Lastly, the Wi$eUp program will offer her all the advice she needs at this point in her life. For people in their 30's they need to focus on reducing debt, building up cash reserves, and adding to retirement accounts. Focusing on those 3 things will pave the way for a solid financial future. Good luck, Lynn Anne Gillen
Delores Lenzy - Jones, CPA, CIA:
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I have never seen a ROTH IRA used as a down payment on a home. Please keep in mind the Roth IRA is generally used for investments.
Rachel Lane, CFP:
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As far as getting a higher yield or potential return on your Roth IRA is concerned, it depends on where it's held (at a bank, mutual fund company, or in a brokerage account). I advise finding out what the available investment options are and analyzing their risk and reward features.

As for the using the Roth for a first time home purchase, it is possible. See from the IRS website Roth IRA Distributions. In general, you do not include in your gross income qualified distributions from your Roth IRA. You may have to include part of other distributions from Roth IRA(s) in your income.

A qualified distribution is generally any payment or distribution made after the 5–taxable–year period beginning with the first year for which a contribution was made to a Roth IRA set up for you, and that is made on or after you reach age 59 1/2, made because you are disabled, made to a beneficiary or to your estate after your death, or that is made to buy, build, or rebuild a first home.

A distribution used to buy, build or rebuild a first home must be used to pay qualified costs for the main home of a first time home buyer who is either yourself, your spouse, or you or your spouse's child, grandchild, parent, or other ancestor.

Part of any distribution that is not a qualified distribution may be taxable as ordinary income and subject to the additional 10% tax on early distributions. Distributions of conversion contributions within a 5–year period following a conversion may be subject to the 10% early distribution tax, even if the contributions have been included as income in an earlier year. Refer to [Internal Revenue Service] Topic 558 , Tax on Early Distributions from Retirement Plans, for more information. Hope this was helpful to you!

[Editor’s Note: See also Topic 557, Tax on Early Distributions from Traditional and ROTH
IRAs and IRS Publication 590, Individual Retirement Arrangements, which includes as a qualified distribution in the second column on page 65 “One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).” The material under First home in Chapter 1 can be found at the top of the first column on page 55. Under the heading “First-time homebuyer” in the same column, you will note that it says that “Generally, you are a first-time homebuyer if you had no present interest in a main home during the 2-year period ending on the date of acquisition of the home which the distribution is being used to buy, build, or rebuild.”]
Joan Koonce, Ph.D:
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Yes, funds from a Roth IRA can be used toward the purchase of a first home. You need to have had the Roth for 5 years. There is also a limit to how much of the funds you can use for a first home purchase. I believe the maximum is $10,000.
Rebecca Schreiber CFP®:
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It sounds like you have been diligently funding your Roth IRA but not investing the funds. Why not invest the funds and put them to work? Several brokerage firms offer all-in-one mutual funds that diversify your portfolio for you. Look for these Lifecycle or Retirement Date funds. If you had always intended to use these funds for the down payment, then by all means continue with your plan; however if you had originally intended to use the funds for retirement, and the plan was derailed due to a lack of investing knowledge, then get your plan back on track by educating yourself in Lifestyle and Retirement Date funds and put the money to work.

Best wishes, Rebecca Schreiber
Gail Rosen, CPA:
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The Roth IRA would in fact be subject to a 10% excise tax on the earnings distributed, since the distribution is non-qualified under the
tax law.

In summary, you would have to pay both tax and the 10% additional penalty (excise tax) on the earnings of the Roth IRA.
Wendy Weiss, Ph.D.:
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A budget is a wonderful thing! It helps you plan the use of your money and get control.
A budget starts with a good look at your income--take home pay. The goal is to make certain that your weekly or bi-monthly take home pay covers everything you spend money on (and leaves you a bit more to save).
Start by writing down your monthly take home pay amount. Then, every day, for the next month, keep track of every penny you spend, whether it is for bus fare or a toll, rent, co-pay, hair care, food, alcohol, snacks, lottery ticket. Everything! At the end of each week, write it down and then total it up. Take a good look at what you "reach-in-your-pocket--and remove-money-for". Make a list with the important stuff at the top (food, rent, electricity, heat, etc) and the monthly cost. By the end of the month, you will have a very good record of where your money went.
Then sit down, and decide--if you were going to do it over again--where you would REALLY want your money to go. That would be a budget. It guides you to set aside money each paycheck to pay for your rent and food. And it helps you resist reaching into your wallet for that expensive....... (You fill in the blank).
Write down that guide (or plan) for your money. Then set yourself a deadline. And use that deadline as THE DATE when you will make sure that you are spending just what you REALLY WANT TO SPEND and saving or keeping in your wallet, what you do not really need to spend.
Now, that budget should include saving for important things--like a down payment for a home, an insurance payment you have once a year, a car repair or other repair, etc. and emergencies--like a long illness or job loss.
If you cannot wait to save for a home and if you are absolutely sure that 1) this home is not priced too high, and 2) a mortgage loan will have an interest rate that you can afford now, and 3) you will pay off the loan in 15 years or 30 years--before you retire (and NOT re-finance so that you will STILL OWE MONEY WHEN YOU RETIRE), you can consider buying a home.
It is possible to use some ROTH IRA money for a down payment IF
1) You have held the money in a ROTH IRA for at least 5 years and
2) This is a "qualified first time purchase" of a home. But, you can only use $10,000 of that Roth money. So you may need more money than that for your down payment.
So start with a budget, look around for the perfect house, and save a lot for the down payment. A big down payment will mean that your monthly mortgage payments will be LOW, so you can live comfortably in your new home.