Using Roth IRA for first home purchase

[veggivet]

There is a provision that allows first time home buyers to remove up to $10k of earnings from a Roth IRA to use toward the purchase of a first home tax and penalty-free. I'm hoping the Bogleheads can clarify something I came across in my research:

"When you withdraw Roth IRA funds, the IRS will treat the money as contributions until you've withdrawn the full amount you've put into the account over the years. You'll only withdraw up to $10,000 earnings once you've already withdrawn all your contributions."

This doesn't make sense to me. You can take out your contributions from a Roth anytime. Why would anyone remove all contributions just to get access to $10k in earnings? What am I missing?

www.thebalancemoney.com/roth-ira-first- ... er-5270415

[Doc7]

There is a provision that allows first time home buyers to remove up to $10k of earnings from a Roth IRA to use toward the purchase of a first home tax and penalty-free. I'm hoping the Bogleheads can clarify something I came across in my research:

"When you withdraw Roth IRA funds, the IRS will treat the money as contributions until you've withdrawn the full amount you've put into the account over the years. You'll only withdraw up to $10,000 earnings once you've already withdrawn all your contributions."

This doesn't make sense to me. You can take out your contributions from a Roth anytime. Why would anyone remove all contributions just to get access to $10k in earnings? What am I missing?

www.thebalancemoney.com/roth-ira-first- ... er-5270415

https://www.irahelp.com/slottreport/rot ... ring-rules


The math is much easier in the long run by the rules they have laid out. No earnings are removed until all contributions are removed.

[sailaway]

Because they want at least their contributions + $10k, probably.

If you want less than that, you don't even need to invoke this rule, so it is moot.

[veggivet]

Gotcha, so there's nothing special about this particular 'first time home' purchase option. Just take out $10k and call it a day.

[lakpr]

Gotcha, so there's nothing special about this particular 'first time home' purchase option. Just take out $10k and call it a day.

Yes, assuming you'd have *CONTRIBUTED* at least $10k prior to the home purchase. Which would mean at least two years worth of contributions. Or done a tIRA->rIRA conversion at least 5 years prior.

Back in the day when we started, the limits were only $2k for Roth IRAs .... so it took at least 5 years before we reached that $10k limit.

[veggivet]

Thanks, in this case, we're talking about my daughter's Roth IRA, which has been open since 2007 and has much more than $10k in contributions.

Thanks to all who responded!

[sailaway]

Gotcha, so there's nothing special about this particular 'first time home' purchase option. Just take out $10k and call it a day.

Incorrect. This option allows you take out all of your contributions + $10k.

Or if you qualify for a first home after several years of early retirement, maybe you have already taken out most of your contributions, so you can take out the remaining contributions + up to $10k.

If you only want $10k, and you have at least that much in contributions, then the rule doesn't apply to your situation.

[KingRiggs]

If my ability to purchase a home hinged on whether I could pull $10k from a Roth IRA, I don’t think I’m in a good financial position to buy said home.

[260chrisb]

If my ability to purchase a home hinged on whether I could pull $10k from a Roth IRA, I don’t think I’m in a good financial position to buy said home.

Exactly what I was thinking.....

[junior]

If my ability to purchase a home hinged on whether I could pull $10k from a Roth IRA, I don’t think I’m in a good financial position to buy said home.

You might be in a bad financial position, but renting does not necessarily make your financial position better.

[KingRiggs]

If my ability to purchase a home hinged on whether I could pull $10k from a Roth IRA, I don’t think I’m in a good financial position to buy said home.

You might be in a bad financial position, but renting does not necessarily make your financial position better.

Roth space is too precious to squander, IMHO.

I’d exhaust every other Avenue before tapping my Roth at that young age.

[invest4]

If my ability to purchase a home hinged on whether I could pull $10k from a Roth IRA, I don’t think I’m in a good financial position to buy said home.

You might be in a bad financial position, but renting does not necessarily make your financial position better.

Roth space is too precious to squander, IMHO.

I’d exhaust every other Avenue before tapping my Roth at that young age.

Fully agree.

Similarly, while we don't know the details of this home purchase or OP's portfolio, the need to tap this money makes me wonder if this is really the only / best solution for OP.

[junior]

Roth space is too precious to squander, IMHO.

I’d exhaust every other Avenue before tapping my Roth at that young age.

This is typical Boglehead advice. The economic concept of consumption smoothing has a different take:

Since income tends to be hump-shaped across an individual's life, economic theory suggests that individuals should on average have low or negative savings rate at early stages in their life, high in middle age, and negative during retirement.[3][4] Although many popular books on personal finance advocate that individuals should at all stages of their life set aside money in savings, economist James Choi states that this deviates from the advice of economists.[5]

From Wikipedia on consumption smoothing

[sailaway]

If my ability to purchase a home hinged on whether I could pull $10k from a Roth IRA, I don’t think I’m in a good financial position to buy said home.

You might be in a bad financial position, but renting does not necessarily make your financial position better.

Roth space is too precious to squander, IMHO.

I’d exhaust every other Avenue before tapping my Roth at that young age.

Fully agree.

Similarly, while we don't know the details of this home purchase or OP's portfolio, the need to tap this money makes me wonder if this is really the only / best solution for OP.

And yet, we also tell people to go ahead and fund their Roth's over some other goals, especially vague future goals, precisely because they can tap it if need be.

[invest4]

If my ability to purchase a home hinged on whether I could pull $10k from a Roth IRA, I don’t think I’m in a good financial position to buy said home.

You might be in a bad financial position, but renting does not necessarily make your financial position better.

Roth space is too precious to squander, IMHO.

I’d exhaust every other Avenue before tapping my Roth at that young age.

Fully agree.

Similarly, while we don't know the details of this home purchase or OP's portfolio, the need to tap this money makes me wonder if this is really the only / best solution for OP.

And yet, we also tell people to go ahead and fund their Roth's over some other goals, especially vague future goals, precisely because they can tap it if need be.

Fair enough. For me, the funding for a house is straightforward in that I simply decide how much I wanted to save for retirement / other vs what was needed for the house. Like most people, I did not have enough income to fully satisfy all my goals at the same time. My decision would make that journey longer or shorter. Pulling monies out of my existing retirement savings never entered my mind. Not surprisingly, opinions may vary.

Ultimately, everyone has decide their own financial priorities and how they wish to fund them. Importantly, we give the OP some things to consider (particularly those which they may not have yet contemplated) and help them arrive at the decision that works for them.

[linuxizer]

You can also put money back into a Roth up to about 30 days later. So with a spouse that’s 60 days to close on the house and then a HELOC to replete the Roth space.

[Alan S.]

If you want to withdraw from the Roth for a first home, and have enough regular contribution basis, do NOT enter a figure on line 20 of Form 8606.

If you do, your lifetime limit of 10,000 will be reduced, and your distribution will not follow the usual ordering rules for Roth distributions. Instead, the line 20 amount will come from your gains if you have them and your distribution of gains will be qualified and tax free.

However, the next time you need a Roth distribution, your Roth basis will be reduced by the amount of gains you distributed via the worksheet in Pub 590 B, so those gains pop back into your Roth IRA. All line 20 does therefore is to allow you borrow from your gains up to 10k, then the amount you borrowed reduces your basis in future years, not your gains. The reduced basis will not hurt you however once your Roth becomes qualified and you never distributed taxable gains after the qualified first home distribution.

[JimmyD]

Perhaps another option is a 401k loan? We had to get creative when we found a home we wanted to purchase in what was a crazy real estate market a couple years ago.

We made an offer on the house without yet selling our current home at the time, so I took out a pretty sizable 401k loan to fund the down payment while we waited for the other home to sell. I immediately repaid the 401k loan when both deals closed.

Obviously, there are some risks involved with this strategy, but it worked out well for us.

[veggivet]

Just to follow up and thank all those who responded. My daughter decided to leave her Roth IRA untouched and use other sources of funds for the downpayment.

[JimmyD]

Just to follow up and thank all those who responded. My daughter decided to leave her Roth IRA untouched and use other sources of funds for the downpayment.

Wise move!