Can You Use A Roth IRA To Buy A House? Here’s How

Prospective home buyers often wonder if you can use a Roth IRA to buy a house? The short answer is yes, you can leverage a Roth IRA withdrawal to purchase a property, but the process comes with specific rules attached. You’ll want to review all potential options for funding your upcoming home purchase before deciding if buying a house this way makes good financial sense, and fits within your budget. Otherwise, you might get hit with early withdrawal penalties.

That said, it bears noting that thousands of home buyers – especially first-time home buyers – look at Roth IRA accounts as a vehicle through which to grow their savings and fund potential home purchases annually. Let’s take a closer look at how to use your Roth IRA to buy a house, potential alternative financing methods and which options might make the most sense for you.

What You Should Know Before Withdrawing From Your Roth IRA

Prior to making a Roth IRA withdrawal to buy a home, it’s important to be aware of prospective upsides and downsides of doing so.

Yes, you can withdraw money from your account to fund a home purchase. However, you may need to meet certain eligibility requirements if you want to avoid a 10% early withdrawal penalty fee or paying taxes on various sums.

Because you’ve already paid taxes on associated contributions, Roth IRA holders can withdrawal total sums that equal the contributions they’ve made to the account with no tax or penalties as needed. Once you’ve tapped out any contributions, according to the IRS, if you qualify as a first-time home buyer, you can withdraw up to an additional $10,000 (lifetime limit) for a home purchase without penalty. However, if you have had the Roth IRA account for less than 5 years since contributions began or seek to pull out larger amounts of money, you may owe income tax on any earnings or additional sums.

How To Use Your Roth IRA To Buy a Home

If you’re a first-time home buyer with a Roth IRA account that’s been open for a minimum of 5 years, you can withdraw your contributions and up to $10,000 in earnings tax- and penalty-free. If you’re not a first-time buyer but you’ve had your Roth IRA for at least 5 years (referred to as the 5-year rule), you can withdraw any account contributions, provided you meet any additional requirements.

• Step 1: In the years prior to withdrawal, make a point to actively maximize your Roth IRA contributions. Doing so can help you ensure that you have as much working capital as possible on-hand for when it’s time to buy your home. Funds can ultimately be applied toward your down payment, closing costs or home purchase price.
• Step 2: Pick a mix of investments, such as stocks and bonds that are in keeping with the timeframe that you plan on buying your home in. Remember that up to $10,000 in earnings can be taken out without incurring taxes of penalties if you’re a first-time home buyer. You should always speak with a qualified financial professional if you need investment advice.
• Step 3: Make sure you follow the 5-year rule to avoid penalties. Before seeking to withdraw from your IRA account, make sure it’s at least 5 years old. Otherwise, you may be hit with penalties or taxes on the money.
• Step 4: Review your plan documents to understand any terms and conditions that may apply to your Roth IRA withdrawal. Think about how much you’re looking to remove from the account – and how it may impact your long-term savings and investment potential.
• Step 5: Once you’ve reached the 5-year minimum, and have accrued enough savings in your Roth IRA, you’ll be ready to withdraw funds as needed. Contact your account provider to withdraw all contributions that you have previously made, and (potentially) up to $10,000 in earnings penalty- and tax-free to put toward your new home.

Roth IRA Alternatives To Buy A House

Of course, tapping into your Roth IRA isn’t the only way to fund a down payment on your new home. When buying a home, you may also wish to consider a number of other funding solutions for getting your hands on extra money as you go about considering how to pay for your new property.

Keep in mind that many of the below solutions are specifically designed to address the needs of first-time or low-income home buyers. Most are meant to provide a helping hand in terms of applying less stringent qualification requirements for securing financing or more favorable loan terms.

First-Time Home Buyer Programs

A number of different first-time home buyer programs offered by federal, state and local governments and a host of different agencies can help you purchase a house. Most commonly, such aid is offered in the form of low- or no-down payment or closing cost assistance, or first-time home buyer loans, educational programs and assorted tax credits.

Remember, you don’t necessarily need to have never owned property before to be eligible for such programs. In many cases, a borrower who has not owned a primary residence in the last 3 years will qualify as a first time home buyer. To find out if you’re eligible to qualify for a first-time home buyer program, you must:

• Not have owned your primary (aka principal) residence for the past 3 years
• Generate income lower than certain preset limits as defined by local, county or state guidelines
• Qualify to afford a certain level of minimum monthly payment, given your current income and debts
• Have a certain amount of funds set aside for down payment and closing costs
• Be purchasing a property that’s situated in a certain geographic area and location
• Be buying a home that costs less than a preset limited amount

High-Yield Savings Accounts

A high-yield savings account functions much like a traditional savings account, albeit one which pays a higher interest rate. These accounts make good options for savers who are looking to grow their balances, and often come with no minimum or opening balance requirements attached. If you’re thinking about buying a home, options from different banking and financial technology (fintech) providers can help you build up a sizable nest egg to put toward your purchase of or down payment on a new property faster.

401(k) Loans

Think of it as borrowing money from yourself. Using a 401(k) loan, you can generally withdraw a balance of no more than $50,000 or 50% of the lesser of the vested value of your retirement savings account without penalty. However, not all 401(k) plan programs allow for loans to be issued. To find out if your plan allows for 401(k) loan options, and just how much you are eligible to borrow, contact your plan administrator. Also be advised that 401(k) loan terms vary and so do the benefits of using one depending on the sponsor and provider.

Low- To No-Down Payment Mortgages

If you qualify, certain home loan options provided by various government agencies offer low or zero down payment options if you wish to avoid tapping into your retirement savings in order to buy a home. Here are a few examples.

• VA loans – Backed by the Department of Veterans Affairs (VA), these federally backed mortgage loans are meant to help provide affordable mortgages and housing for veterans, active duty service members and qualifying spouses.
• FHA loans – Promoted by the Federal Housing Administration (FHA), FHA loans are designed to help low- and moderate-income buyers achieve the dream of homeownership with less upfront savings and spending.
• USDA loans – Offered by the U.S. Department of Agriculture (USDA), these rural housing loans help provide financial assistance to those located in rural areas. No, you don’t have to live on a farm to receive one – and no-down payment options are available.

The Bottom Line

In short, yes, you can absolutely use a Roth IRA to buy a house if needed. At the same time, because withdrawing funds can potentially come with penalties, tax burdens and certain limitations attached, it’s not always the best way to finance a new home purchase. Certainly, you can tap into your Roth IRA to help with a down payment on a property, or to assist with the total sales price and closing costs. But keep in mind that many alternative financing options are available to those in need of extra cash, especially if you qualify as a first-time home buyer.

Prior to tapping into your Roth IRA savings, it’s critical to do a little number crunching. Take some time to review your finances and set realistic goals. It’s important to do your homework upfront and research potential home financing strategies before cashing out money from your Roth IRA.

Ready to start an application for a home? Connect with an agent today.