You Want to Buy a House—Can Your Roth IRA Help Make That Dream Come True?

May 7, 2009

Dear Carrie,

I have a Roth IRA. Am I able to use it for a down payment for a mortgage on the purchase of a house and have the capital gains remain tax free?

—A Reader

Dear Reader,

It seems like such an easy question, but when it comes to the tax code, nothing is simple. The short answer is “yes,” but let’s review the rules for Roth IRA withdrawals—then I want to discuss what I consider to be the larger issue of tapping your retirement account for a down payment.

It’s Your Money

First, remember that all Roth IRA contributions are made with after-tax dollars—the IRS (and your state government, if you pay state income tax) has already taken its share —so you can withdraw your contributions at any time for any reason with no tax liability.

But when it comes to your Roth IRA earnings—the income and capital gains your account has accumulated over the years—a withdrawal may trigger tax liabilities. The distribution will be considered ordinary income and taxed accordingly, along with a 10% penalty, unless you can meet the following criteria:

  • First, the withdrawal must occur after a minimum of five “tax years.” (A “tax year” begins on January 1 of the year for which you make the contribution, regardless of the actual date of the contribution.)
  • In addition, at least one of the following must be true:
    • You are 59 ½ years old.
    • You are the beneficiary of the asset after the original owner’s death.
    • You are disabled.
    • Or—and this is the criterion that applies to your situation—you are a first-time homebuyer. (Note that this legislation defines a “first-time homebuyer” as someone who hasn’t owned a principal residence for three years. Owning a rental property or a vacation home will not disqualify you.)
The homebuyer exemption allows you to use up to $10,000 of Roth IRA assets to help with your down payment (and, for the record, you can make a tax-free, penalty-free withdrawal of up to $10,000 to help a spouse, child, or grandchild who is a first-time homebuyer). But if you want to withdraw more, you may face some taxes and penalties.

As an example, let’s say you want to use $40,000 from your Roth IRA for a down payment. The first $20,000 comes from your own contributions—no problem. The next $10,000 comes from your Roth IRA earnings, but is exempt from tax or penalty because you’re using it for a down payment. And the final $10,000 will be taxed as ordinary income and subject to a 10% penalty as well.

The picture gets complicated if some of the assets are “converted” —from an IRA to a Roth IRA. If your Roth account includes converted assets, definitely consult a tax expert before you do anything.

You Can—But Should You?

The obvious lesson from the example above is to avoid taking out more than you have to so that you don’t trigger any tax liabilities or penalties. But I think the more important lesson is to think through the consequences of raiding your retirement account for the purpose of buying a home.

I recognize that a home of one’s own is an important goal for millions of people, and I completely understand that. But as I mentioned at the outset of this column, I hope you’ll think carefully before you actually take the money out of your Roth IRA. If you took out, say, $25,000 for your down payment, that’s $25,000 less in your retirement portfolio. It’s easy, especially in this market, to forget just how valuable the potential for capital appreciation can be. Just as an example: If you’re 35, with at least 25 years to go before you’ll retire, and that $25,000 could earn 6% annually (a pretty conservative figure, I think), you’d have almost $200,000 when you turn 60. It’s that potential wealth creation that you’re giving up when you raid your retirement account.

At the same time, home prices have declined, and now may turn out to be a good time to buy, and your Roth IRA may be the asset that will help you do so. But weigh the pros and cons before you act—and consult an expert if you’re unsure about the tax implications of your situation.

Another Resource for First-Time Buyers

I should mention here another way for first-time buyers to get some help: the First-Time Home Buyer Tax Credit that’s part of the 2009 stimulus bill. First-time buyers, subject to certain income restrictions, who buy a home between January 1, 2009, and December 1, 2009 (note well: December first, not 31st!) can get a tax credit of $8,000 on their 2009 income taxes. That’s a credit—so as long as your tax liability is at least $8,000, it’s like money in your pocket. It will be refunded on your 2009 tax return, so it may not help you with the down payment, but it will give you some money back early in 2010.

Good luck!

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities and investment strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction and investment strategy for his or her own particular situation. Data contained here is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.


The information on this website is for educational purposes only. It is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.


Learn how to manage your savings no matter where you are in life.


Use savings and debt calculators to help you reach your financial goals.

Learn More