Roth IRA to Fund First Home Purchase

[iTellStories]

Hi everyone,

I tried searching for this topic, as I'm sure it's been discussed, but I can't seem to find it via the search function on the forum.

I am a single 34 year old in the market to buy my first house.  I've got an 820 credit score, no debt, and make around 100-120k a year depending on yearly bonus.  I've got $100k in my Roth 401k, and $21k in my Roth IRA, but only have about $10k cash on hand.

I really would like to stop renting, as my housing costs would drop around $500 a month if I purchased.  I am considering dipping into my Roth IRA ($18k of the $21k are contributions) to help make my first home purchase possible this year instead of next year.

Has anyone dipped into their Roth IRA to make their first home purchase before?  If so, any regrets?  The condo market in my area is actually a buyer's market right now, so it has me considering this option more and more.  Or, should I just stomach renting for another year and save the cash needed and hope the condo market doesn't sway from my favor by next year?

[Greystache]

About 25 years ago, I was in a similar position. I had lots of income and not a lot of cash on hand. I did not want to wait to build up to a cash down payment. I wanted to buy a house at what I felt was near the bottom of the market cycle. I borrowed from my 401K for the down payment. As it turned out I was fortunate to buy at the very bottom of the market and my house rapidly appreciated. I was able to repay the loan in a short period time. My retirement savings where temporarily sidetracked, but I have no regrets. I was still able to retire early on the at the exact time that I had planned.
Having said all that, I tend to agree that borrowing from one's 401K is usually a bad idea, but in this case it worked out ok for me.

[Buffaloski Boris]

This sounds like FOMO.

Homeownership can be a black hole that you toss money into, so if it’s me, I’m not touching the Roth. I prefer to use those as an emergency fund. Or for retirement.

If homeownership is something that inspires you given your income, then I think you’ll be able to save the money you need pretty quickly anyway. Plus time will be on your side. If you find a jaw dropping good deal, you can reassess. Chances are you won’t find a deal of a lifetime soon, so you’ll be biding your time while building your home buying stash.

[MrDelane]

It's difficult to know how to answer this without knowing your current savings rate. How long will it take you to save up 18K in cash?  Because pulling it out of your Roth IRA will take you 3 years to recoup if you max it out (with a yearly contribution limit of 6K).

Also - how certain are you of your housing costs dropping 500/month?  Are you considering added insurance, maintenance, property taxes, increased utilities, etc?

[Bird In Hand]

I really would like to stop renting, as my housing costs would drop around $500 a month if I purchased.

If you have other reasons why you prefer ownership vs renting, fine.  I know I've always been miserable renting due to an inability to tolerate noise from neighbors.

But if it's just about $$, just be realistic about what you're really going to save.  Have you accounted for taxes, insurance, increased utilities, more furniture/furnishings, replacement roof/driveway/HVAC/appliances, plumbing/HVAC/appliance repairs or service calls, various forms of property maintenance, etc.?  I don't think most people -- myself included -- really had a clue about actual home ownership costs prior to owning their first homes.

[seattlecyclone]

Consider a 401(k) loan as an alternative. The amount you're talking about withdrawing ($20k) is a low enough percentage of your annual income that I don't think it's the biggest sin to temporarily remove this amount from a retirement account so you can pull together a down payment a few months sooner.

The disadvantage of withdrawing from your Roth IRA is that if you tend to max out your retirement contributions a withdrawal is coming out of a previous year's contribution and once it's out it's out. With a 401(k) loan you can still do your full contribution for the year, plus you have the opportunity to put back the amount you borrowed against prior contributions. The main potential gotcha with this method is that if you switch jobs before paying off the loan, the loan becomes due immediately. If you fail to repay it in this circumstance it's treated as an early withdrawal, which has a bit worse tax treatment coming from a Roth 401(k) than a Roth IRA. If you expect to be able to replace the $20k before switching jobs I'd lean in the direction of a 401(k) loan.