Using a Roth Ira to Buy a House

With a Roth IRA, house purchases can be a lot easier to complete. This type of retirement account has a provision that makes it simple for account holders to use their money to purchase a home. If you are going to raid your retirement funds to buy a house, the Roth IRA is definitely the best choice of retirement accounts to use. Here are the basics of buying a house with your Roth IRA.

Roth IRA

A Roth IRA is a type of individual retirement account that you fund with after-tax dollars. You can put up to $5,000 per year into your Roth IRA. Once you contribute to the account, you can use the money to invest in various securities. If you have been doing this for a number of years, you could potentially have a large account balance. If so, you can potentially use part of this money to purchase a home with. With Roth IRAs, any of the principal that you have deposited into the account can be withdrawn at any time without taxes or penalties. Since you have already pay taxes on the money, the government does not care if you take it back. However, if you take out money that has been earned from investments, you will typically have to pay a 10% early distribution penalty as well as pay taxes on the money. 

First-Time Home Buyer Provision

If you are a first-time home buyer, there are special rules apply to you when it comes to using the money from your Roth IRA to purchase a home. Once you have had your Roth IRA open for five years, you can use the money in your account to pay for the down payment on a house. You can even access money that has been earned from investment returns without having to pay a penalty. You can access up to $10,000 with this exemption. With this program, you can only take the money one time. According to the IRS rules, you will qualify as a first-time home buyer if you have not owned a house within the last two years. 

Separate Accounts

With this program, you could potentially access two different Roth IRAs to increase the amount of money that you have available for a purchase. If a couple has two individual Roth IRAs, they could each access $10,000 from their personal accounts.

Using the Money

When you utilize this program, you have to make sure that you only use the funds for qualified acquisition costs. This means that if the money does not go towards the actual purchase of the property, you will have to pay taxes and penalties on that amount of money. For example, if you use part of the money to pay for furniture or to make a mortgage payment on the house, you will be charged a penalty for that amount of money. You should only use the money on purchasing a home, building one, or on the closing costs. 

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