Author Topic: Using Roth IRA to save for downpayment  (Read 4393 times)

Guizmo

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Using Roth IRA to save for downpayment
« on: February 24, 2014, 09:19:36 PM »
Just thinking, is there a reason why I shouldn't use a roth IRA to save $5500? I'm hoping to save $30k for a downpayment on an investment property. I would access it in almost exactly one year. The only thing I can think of is that if the market is down by that time, I would potentially have less money to withdraw. So instead of $5500, maybe 4900 or even less.

AlanStache

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Re: Using Roth IRA to save for downpayment
« Reply #1 on: February 25, 2014, 04:10:17 PM »
Are you looking to park the cash in an IRA, invest it and pull the principle out to make the down payment leaving any gains in the ira?  yes I think you could legally do that (IANAL etc...) but I very much question putting money into the market you know you want to put down on a house in a short time? 

Or are you looking to use the ira to save for many years (30k) then use it as a down payment?  I have no clue what the tax and legal consequences of this could be.  But I would lean away from it if you cant re-fund the cash you took out effectively loosing decades of tax free growth.  you position might make it different where the math works out.

Guizmo

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Re: Using Roth IRA to save for downpayment
« Reply #2 on: February 25, 2014, 05:03:05 PM »
I decided to pull the trigger and open up an ROTH IRA account with Vanguard. Since it is a roth, I am able to withdraw the contributions penalty free as well as tax free, since I paid the tax up front. I just can't withdraw earnings. I can only invest $5500 during the year, but since I did not have an IRA prior to today I could still contribute for last year. I started with $6k, half is going to bonds, paying around 2-3% and the other half is going to the total market index fund. After I withdraw the money, I have until tax time to put back in what I withdrew so I can still have "catch up". 

We will see if this will end up costing me  a few hundred dollars. If the market crashes by the time I have to withdraw the money I'll just leave it there long term.

Cromacster

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Re: Using Roth IRA to save for downpayment
« Reply #3 on: February 25, 2014, 06:31:46 PM »
I guess I don't really see the point of using the Roth as a vehicle for saving for a house down payment.  Are you going to save for six years to get the 30k in the Roth?  The real advantage of the Roth is the long term.  By removing the 30k in principle you are losing the opportunity for the money grow substantially over a long period of time, tax free.  And you can never get that money back in once you withdraw it.

My advice.  Continue to max out your roth, save for your house elsewhere.

sheepstache

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Re: Using Roth IRA to save for downpayment
« Reply #4 on: February 25, 2014, 06:53:40 PM »
I think the question is: if you do not have enough money to max out an IRA each year for retirement purposes, can you really afford an investment property?

Obviously there are details of your situation I'm not aware of.  It sounds like you are putting all of your investment capital into a single property.  Which may indeed be the way you want to go and obviously you would be aware of the lack of diversity there.  But if not, why wouldn't you be maxing out an IRA each year just for your long-term investing and then saving for the downpayment outside of that?  But I mean, yes, legally, you can do what you're saying assuming you've had the IRA account open at least 5 years.

Guizmo

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Re: Using Roth IRA to save for downpayment
« Reply #5 on: February 25, 2014, 08:14:14 PM »
Cromacster: Well, I guess the reason I am putting money in a roth for this purpose is that it feels like keeping 6 grand I have right now in my savings account is only earning me .85% in interest. The hope is that with the roth, and with the investments chosen I might get a short term return of 5-7%. There seems to be a rule stating that I can 'return' the withdrawals that I make within 1 year. So I might still be able to make up for the money that I would withdraw.

Sheepstache: The answer to your question is yes! I actually already own an investment condo that I am about to payoff. I also contribute to my pension plan and to a 401k. My FIRE plan is to own 2-3 SFHs and $350-400k in the stock market. To be honest, the only thing I don't like about using the ROTH for this purpose is that I feel like I am just speculating that the market will have a year were it will at least do better than my .85% savings account. No one knows, so I guess I am kinda gambling.

sheepstache

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Re: Using Roth IRA to save for downpayment
« Reply #6 on: February 25, 2014, 08:58:05 PM »
I mean, the only thing is if, at the time you make the purchase, you have money in the stock market that's not in an IRA, you should sell that first (assuming it makes sense for the underlying investments, of course).  And any year when you are putting money in the stock market, you should be maxing out your IRA first.

Someone can correct me if I'm wrong, but I don't think you can take a tax deduction for selling at a loss in an IRA.  That could be extremely relevant for short term speculation like this.

Also, doublecheck what I said about the 5-year rule thing because I'm not sure if you literally have to have had the principal you're selling for 5 years vs. the account being open for 5 years.  I've read the latter on a lot of websites but haven't looked at the IRS wording for some time.