Pulling Money From A Roth IRA To Buy A Home

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Many Americans simply don’t have the cash to cover their down payment, closing costs and other expensive homebuying needs. But if you meet certain requirements, you might be able to tap into your Roth IRA without taxes or penalties to help you buy a home. 

While using your Roth IRA is an option, it may not always be the best choice. Make sure you know the pros and cons of pulling money from a Roth IRA to buy a home before you take the leap.

Can you use a Roth IRA to buy a house?

In some instances, you can use your Roth IRA to buy a home, but you’ll need to meet a few eligibility requirements first.

For instance, the funds are only eligible for this use if you meet the first-time homebuyer qualifications. You can’t use this money if you’ve owned a primary residence within the last two years.

When it comes to how much you can take, it depends. There’s no limit on how much you can take out from your contributions without facing a tax, since that money was contributed with after-tax dollars. But if you’re withdrawing earnings, there’s a $10,000 lifetime limit, as long as you have that money in your account.

Pros and cons of pulling money from a Roth IRA for homebuying

There are several pros and cons of using money from a Roth IRA to buy a home:

Pros

• First-time homebuyer exemption: The first-time homebuyer exemption allows you to withdraw up to $10,000 from a Roth IRA to pay for a home purchase. If you are a first-time homebuyer, you may be able to avoid penalties and fees from the withdrawal.
• Withdraw contributions at any time: Because contributions to a Roth IRA are made with after-tax dollars, you can withdraw the contributions (not earnings) at any time without incurring penalties or fees.
• Build home equity: If withdrawing from your Roth IRA enables you to buy a home, it can also allow you to start building home equity. This can also create wealth if the value of the property increases.

Cons

• Penalties and taxes: If you withdraw more than $10,000 as a first-time homebuyer, there may be penalties and taxes. Or if you withdraw earnings under 59 ½ and the account is under five years old, there may be a 10 percent penalty, plus taxes.
• Loss of potential earnings: Less money in your Roth IRA means a loss of compound interest. This means you’ll lower the earning potential of your Roth IRA and hurt your retirement.
• Reduced retirement savings: The purpose of the IRA is to fund your retirement. Withdrawing funds early means you may have less cash available when you retire.
• Less liquidity: While homes are valuable assets that can appreciate, they are far less liquid than the money in your Roth IRA.
• Market risk: Homes can appreciate, but that is highly dependent on the local real estate market.

Alternatives to pulling money from a Roth IRA

There are several alternatives to using money from your Roth IRA to buy a home, including:

• Delay your purchase: Rather than borrow from your future self, put off buying your home until you have enough for a down payment. 
• Borrow from your 401(k): Consider a 401(k) loan. Unlike early Roth withdrawals, 401(k) loans can be repaid and you don’t reduce your 401(k) balance. However, you must pay interest as with other loan types.
• Try a HELOC: If you already own a home, explore a home equity line of credit (HELOC). With this type of loan, you borrow against your existing home equity to fund your purchase. However, your home is collateral with a HELOC. If you fail to make payments or fall behind, you could face a lien on your home.

Bottom line

Using money from your Roth IRA to buy a home is tempting, especially with home prices constantly rising. While it has its advantages, there are many potential downsides, like penalties and taxes and loss of potential earnings. Explore all your options first before pulling money from your Roth IRA to fund your home purchase.

— Bankrate contributor Dori Zinn contributed to an update of this article.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.