Using a Roth IRA for a Down Payment – episode 371

by | Feb 9, 2024 | Videos

Using a Roth IRA for a Down Payment – episode 371

Key take-aways:

  • If your company offers a match, consider contributing up to the amount where you will get a match.
  • If you have an option for a Roth 401(k) contribution, you really ought to consider it.
  • Start building your nest egg today and get that emergency fund established.
  • You can use contributions to your Roth IRA for a down payment when buying a house, and up to $10,000 in earnings.
  • If the Roth has been held for five years or more, up to $10,000 in earnings can be withdrawn without triggering a taxable event.
  • If the Roth IRA is less than five years old, you can still withdraw your contributions and up to $10,000 in earnings, but the earnings will be taxable.
  • The $10,000 from your Roth IRA for a down payment (home purchase) is a lifetime exclusion.
  • Tapping into your retirement account for a home purchase may be a warning sign to reconsider the affordability of the house.
  • Focus on building an emergency fund, your nest egg for a down payment, before saving for college and retirement.

Using a Roth IRA for a Down Payment – episode 371 – Links

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Using a Roth IRA for a Down Payment – episode 371 – Transcript

We have a message for all of our younger savers out there.

We receive many calls from young people who are just entering the workforce. They are curious about how to allocate their 401(k) or their workplace retirement plan.

The first question we ask in response is, “How much do you have?” or “What kind of amount do you have in a nest egg, an emergency fund, or a savings account?”

More often than we’d like, the answer we receive is, “I don’t have one!”

That’s a problem!

So, what we often tell folks is, “If your company offers a match, you should consider contributing up to the amount where you will get a match.” And if you have an option in your plan that allows for a Roth 401(k) contribution, you really ought to consider it.

But when it comes to saving for retirement, if you’re 25, 27, or even 30 years old and you don’t own a home (but are thinking about buying one someday), then you need to start planning for what’s going to happen in the next three to five years, not something that’s 35 years away.

Many people get caught up putting money away for retirement too soon. Then, they end up needing to either stop their contributions completely or take a loan from their own retirement plan.

Loans have to be paid back, so why even go through that? Start building your nest egg today and get that emergency fund established.

One way to save for retirement while possibly using the money for a house down payment is the Roth IRA.

If you contribute to a Roth IRA, understand that when it comes time to buy a house, you can withdraw the contributions you’ve made. Plus, if you’ve had the Roth for five years or more, you can take out up to $10,000 in earnings as a first-time homebuyer without triggering a taxable event.  You can use the Roth IRA for a down payment (home purchase).

What if you’ve had the Roth IRA for less than five years?  You can still withdraw your contributions, as they were made with after-tax dollars.

AND you can take out up to $10,000 in earnings.
BUT, because you’ve had the Roth IRA for less than five years, those earnings will be taxable income to you.

There’s no penalty because you’re using that money to buy your first home.

The $10,000 that you withdraw from your Roth IRA for a down payment (home purchase) is a lifetime exclusion, so you can only use it once.

Another point to consider—and this may be a bit of a warning sign—is if you’re tapping into your retirement account, you may want to reconsider “how much house” you’re buying if you need to access funds like that.

We always emphasize to our younger savers to think about upcoming events and prioritize them.

Focus on building an emergency fund, your nest egg, and saving for a house.

Later on, as you start a family, consider saving for college and retirement. These are things you can add on as your income grows.

Establish that safety net first—it may become your down payment for a house.

That’s going to be the message for episode 371. Thanks, as always, for tuning in!

 

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