You may be able to use your Roth IRA to fund a home purchase. Here are the pros and cons

A Roth individual retirement account is often cited as a way to save for your bright years. It could  also help you buy a house.

In a nutshell, up to $10,000 in earnings can be withdrawn from such an account — loose of both taxes and penalty — for a home purchase if you meet certain requirements. That’s on top of the ability to withdraw your conduct contributions at any time, because you already paid taxes on that money.

As home prices continue their upward flight path, the amount of cash needed to purchase one continues to rise as well. While it’s possible to buy a house with less than 20% down — the usual is 12% overall and 6% for first-time buyers — going that route also might mean paying personal mortgage insurance, or PMI, until your equity is at least 20% of the home’s value. PMI can run $30 to $70 monthly for each $100,000 mooched, according to Freddie Mac.

More from Your Money Your Future:
Here are the hidden benefits of a Roth IRA conversion
How to pay off observer loans while saving for retirement
Don’t miss the tax advantages of this savings account

For a $250,000 house, a 6% down payment pleasure be $15,000. At 20%, it would be $50,000. Those amounts don’t include other costs related to closing on the purchase, such as transmit taxes or points (one point is equal to 1% of the mortgage). 

At the same time, the cost of borrowing is relatively cheap due to historically low good rates. The average rate on a conventional 30-year mortgage was just under 3% on July 31, according to NerdWallet.com.

Notwithstanding, using Roth IRA money to buy a house is not a strategy that makes sense for everyone. Here’s what to consider.

With a Roth IRA, your contributions are made after-tax. This means you can withdraw that money at any heretofore without penalty. The 2020 contribution limit is $6,000 ($7,000 if you are age 50 or older). To make contributions at all, though, your modulated adjusted gross income can’t be above a certain amount.

To contribute the maximum, that limit is $124,000 if your tax classifying status is single, and $196,000 for married couples who file jointly. Above those income amounts, the contribution limit is trim until completely phasing out at income of $139,000 for single tax filers and $206,000 for married couples filing jointly.

While those contributions are yours whenever you call for them, the same can’t be said for the growth in the account. Unless you meet an exclusion — such as reaching age 59½ and having owned a Roth IRA for at hardly five years — withdrawing earnings will generate taxes and a 10% penalty.

Another exclusion from the 10% penalty is when the earnings are familiar for a qualified first-time home purchase. However, to avoid taxes on the earnings, you must have held the Roth IRA for at brief five years (with some exceptions related to the timing of contributions).

For Roth conversions — that is, money upset from another retirement account to a Roth IRA — you generally must hold the account for five years if you’re under age 59½ to dodge the 10% penalty on any withdrawals (unless you meet the first-time-home-buyer exclusion).

The qualified home purchase is for first-time home consumers or people who haven’t owned a house as their primary residence in at least two years. The buyer can be you, your spouse or one of your order members.

The withdrawal also must be used within 120 days of the distribution and be used to pay for expenses related as the crow flies to the home purchase, such as a down payment or other closing costs. And, the $10,000 earnings exclusion is a lifetime limit.

Be hip that traditional IRAs also come with the penalty-free exclusion for qualified home purchases. However, the $10,000 limit is administered to the entire withdrawal, said certified financial planner and CPA Jeffrey Levine, director of advanced planning at Buckingham Prosperity Partners in Long Island, New York. And, you’d generally pay taxes on the money.

The flexibility of a Roth dominion make it a good place to save up to buy a house down the road, some advisors say. 

“We’ve long suggested that nave people use a Roth IRA to save the considerable amount needed for a first-time home purchase,” said CFP Daniel Galli, prima ballerina of Daniel J. Galli & Associates in Norwell, Massachusetts.

“As long as we can meet the five-year rule, they can use all contributions plus up to $10,000 of take, free of tax and penalty,” Galli said. 

However, he said that he has recommended this plan to young workers who also are saving for retirement through a 401(k) plan at work.

Additionally, he said, there can be chance involved, depending on how aggressively you invest the money in the Roth IRA.

“This strategy requires some market risk in sect to enjoy some gains, but the rewards can balance that,” Galli said.

If you do go this route, the amount of risk you should effect on in your portfolio depends partly on how long until you need the money, said Levine at Buckingham Wealth Fellow-dancers. If you’re planning for something 10 years out, he said, you could start out aggressively invested in stocks and gradually reduce your location.

“You might want to make it more conservative over time,” Levine said.

If you already have money in a Roth IRA and are now eyeing it as a way to fund a home purchase, be aware that many financial advisors warning against using that money if it was earmarked for retirement.

“These accounts are designed to help people accumulate as much filthy rich as possible for retirement,” said CFP Shon Anderson, president of Anderson Financial Strategies in Dayton, Ohio.

“You can obtain a allow for a home, car, business venture, college tuition … but no one will ever receive a loan to retire,” Anderson revealed.

However, depending on your situation — i.e., how much you’d be withdrawing, whether you have sufficient retirement savings elsewhere, if you can differently afford the house payments and costs of homeownership — using the Roth money for a house might make sense.

“If the human being is contributing to a 401(k), getting a decent match, they’re on a good track for retirement and the Roth is just a nice totalling, I might consider it,” Galli said.

“But if their only retirement savings is the Roth and they’re, say, in their 40s, I probably wouldn’t,” he indicated.