Hey all! Super useful forum, thanks for all the insight posted up here. I've been searching around here and elsewhere trying to figure out the answer to this, and have found a half dozen threads talking about using Roth funds for a down payment. My impression from those is that it depends on the situation but is usually a bad idea. But I must be missing something, so thought I'd post.
Theoretical but representative scenario: My spouse and I are not sure if we want to buy a house or not. But if we did, we would need $51k for a down payment + closing costs + fix-up costs. We currently save $51k a year and put it all into maxing out the IRA and 401(k) accounts. We are starting from $0 saved aside from retirement, emergency fund, and checking slush. We have $51k in existing Roth IRA contributions, which we could withdraw at any time with no taxes or penalties.
What's the difference between 1) diverting $51k of savings from retirement accounts and putting it in a savings account instead, and 2) withdrawing our $51k in existing Roth IRA contributions? Seems to me that either way, we're taking from our retirement to make the payment. Which I guess makes this a question of if and when we need the payment, and how the market is doing:
- If we know we want to buy in a year, and 1) divert money to savings:
- If the market does well over the next year, we take a big hit in opportunity cost.
- If the market does poorly over the next year, good for us.
- If we're ambivalent about buying, and 2) keep putting all savings into retirement, but we suddenly change our mind:
- If the market did well in the past year, pull out the Roth contributions, good for us.
- If the market did poorly in the past year, we either can't buy, or take a big hit.
In any given year, the market is more likely to do well than poorly. So if we're ambivalent about buying, I can't see option 1) as being viable. But even if we're "pretty sure" we want to buy... if we're not certain, it still seems like 2) is the better option. And even if we were
certain... if we're okay with the risk, 2) still seems pretty viable. What am I missing here? Thanks!