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. However, this rule does not apply to converted funds. But if you've had the Roth IRA for at least five years, withdrawn profits are free of taxes and penalties, as long as you use them to buy, build, or rebuild a home. First, you can withdraw an amount equal to the contributions you have made to your Roth IRA account without paying taxes or penalties at any time for any reason, as long as you have maintained the account for at least five years.
Here's what you need to know to determine if using your Roth IRA as a first-time homebuyer is right for you. In addition, Galli said, there may be risks, depending on how aggressively you invest the money in the Roth IRA. 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. There are many moving parts to consider when determining whether or not to use your Roth IRA to finance a down payment on 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 Under certain circumstances, distributions can also be withdrawn tax-free prior to retirement from a Roth IRA. 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.
If you've been saving for retirement, it's tempting to loot your Roth IRA for a down payment or to cover closing costs. 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. 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, he said, there may be risk involved, depending on how aggressively the money is invested in the Roth IRA.
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.