Roth IRA and First Time Homeowner

4 Replies

Would like to get the opinion of members on their experience using Roth IRA funds as a first time homeowner. Is it true that if you are a first time homeowner you can use money from a Roth IRA for a down payment? Can you use the total account balance? Or are you limited to only using the value of what you put into the Roth IRA?

Also what happens next? Do you then have to pay back into the ROTH IRA over time? Thanks!

Different treatment for Roths

These homebuying IRA options apply to traditional retirement accounts. The rules are a bit different if your nest egg is in a Roth IRA.

The $10,000 you take out for your first home is a qualified distribution as long as you've had your Roth account for 5 years. This means you can take out your retirement money without penalty, and because Roth earnings are tax-free, you'll have no IRS bill, either.

If, however, you opened your Roth IRA less than 5 years ago, the withdrawal is an early distribution. As with a traditional IRA early withdrawal, a Roth holder can use the first-home exception to avoid the 10% penalty but might owe tax on earnings that are withdrawn.

You can reduce the tax bite by first withdrawing the already-taxed contributions you made to your Roth. In fact, the IRS has specific rules about the order in which you can take unqualified Roth distributions: contributions, conversions from traditional IRAs and earnings. IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs), has details.

Read more:
Follow us: @Bankrate on Twitter | Bankrate on Facebook

Great thank you! What about using a traditional IRA? If you roll over a 401k after leaving an employer into a traditional IRA can you use that in in what capacity for a first time home purchase?

It seems like in both cases you can use up to $10,000 without penalty. To purchase a home can you tap into both a Roth IRA and a Traditional IRA at the same time? Essentially getting you up to $20k total from both accounts to put towards a first time home purchase.

@Jacob Miller

1. Nothing gets paid back because it is not a 401k loan  (i.e., one can only borrow from a qualified plan such as a solo 401k plan not an IRA).

2. First-Time Homebuyer Expenses. This penalty tax does not apply when a distribution is taken from an IRA to pay for certain first-time homebuyer expenses (subject to specific dollar limitations) (IRC Sec. 72(t)(2)(F)).

Qualified Distributions

A distribution is qualified if the Roth IRA owner satisfies two conditions. First, the Roth IRA owner must meet a five-year waiting period for distributions. This period begins on the first day of the taxable year

(January 1 for most taxpayers) for which the Roth IRA owner makes his first Roth IRA contribution (Treas. Reg. 1.408A-6, Q&A 2). The second condition is that the IRA owner meet one of the following penalty tax exceptions (IRC Sec. 408A(d)(2)(A)).

  • Age 59½ or older
  • Disability
  • Death
  • First-time homebuyer

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here