If you're considering using your Roth IRA to finance the purchase of your first home, there are a few things you should know. First, you can withdraw an amount equal to the contributions you have made to your Roth IRA account without paying taxes or penalties, as long as you have maintained the account for at least five years. However, if it's been less than five years since you first contributed to a Roth IRA, you'll have to pay income taxes on earnings. This rule does not apply to converted funds. In addition, if you've had the Roth IRA for at least five years, withdrawn profits are free of taxes and penalties, as long as you use them to buy, build, or rebuild a home.
To understand this concept, it's helpful to see your Roth IRA as savings divided into two groups. Under certain circumstances, distributions can also be withdrawn tax-free prior to retirement from a Roth IRA. It would generally be better to borrow the money, rather than withdraw it from your Roth IRA and let your retirement savings grow at a potentially higher rate of return than the interest rate you pay on your mortgage. However, if you already have money in a Roth IRA and you are now considering it a way to finance the purchase of a home, keep in mind that many financial advisors caution against using that money if it went into retirement. Technically, you can't borrow from a traditional or Roth IRA, but you can access the money for a 60-day period through what's called a tax-free transfer, as long as you put the money back into the IRA (whether you withdrew from or another) within 60 days. For most young adults with other financial obligations and a professional level starting salary, using a Roth IRA to help save for a down payment will require an examination of personal priorities. In addition, there may be risks involved depending on how aggressively the money is invested in the Roth IRA.
If you've been saving for retirement, it's tempting to loot your Roth IRA for a down payment or to cover closing costs. In such a case, the long-term gain on your Roth IRA is more beneficial than the smaller interest payments you would make on a mortgage. While using your Roth IRA money may seem like an easy source to fund a down payment to buy your first home, it may not be the right decision for everyone.
