Creative Source of Funds for Down Payment and Closing Costs

Patrick and I find that closing costs are often the primary obstacle for homebuyers. There is no way around it; living in the DMV is expensive. So, when you are paying a lot for rent, it can be difficult to save aggressively for a down payment.  Today I am going to highlight an often overlooked source of funds for home buying – a Roth IRA.

A Roth IRA is one of the most flexible sources of cash for buying a home, especially a first home. Because you fund a Roth with money you’ve already paid taxes on, you can access a surprising amount without penalties. But there are a lot of rules, so it is important to understand all the guidelines.

Every Roth IRA has two types of contributions – your contributions and the interest earned. Your contribution is money you personally put into the account. You can withdraw anytime, tax-free and penalty-free, to buy a house. The other type of contribution is your earnings or the investment growth on those contributions. That is the part that the IRS restricts. For example, if you have a Roth IRA with a $40,000 balance and you contributed $30,000 and it has earned $10,000, you can take out $30,000 penalty- and tax-free to buy a home.

However, if you are a first-time homebuyer (more on that definition in the next paragraph), you can additionally withdraw up to $10,000 of earnings penalty- and tax-free to buy a home as long as you have had your Roth IRA for at least five years. So, in the example above, if the client was a first-time homebuyer with a Roth IRA opened six years ago, they could withdraw the entire $40,000 tax- and penalty-free.

The definition of first-time homebuyer is also important and very generous. If you have not owned a primary residence in the last two years, then you are considered a first-time homebuyer for this program.

Please contact us with any questions about using a Roth IRA or any other retirement account to help buy a home.