Roth IRAs are designed to support you in your retirement years, but sometimes, you need to tap into the money well before that.  If you’re about to purchase a home, you may be asking, “Can I use my Roth IRA to buy a house?”

In short, the answer is yes, but it’s a little more complicated than that. You can use money from your Roth IRA to buy a home, but you will need to follow IRS rules to avoid an early withdrawal penalty (if you’re under 59 and a half). Here’s what you need to know about using your Roth IRA to purchase a home.

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How Do Roth IRAs Withdrawals Work?

The easiest way to use your Roth IRA to purchase a home is to make a withdrawal from your account.

Qualified Roth IRA withdrawals are tax and penalty-free if done under the right circumstances. A qualified withdrawal is generally one made at age 59 ½ or older. Withdrawals before that age are considered early withdrawals and may be subject to a penalty. However, there are some exceptions that home buyers should be aware of:

  • Current IRS regulations allow IRA holders to withdraw up to $10,000 without penalty if it’s to be used to purchase their first home.
  • As long as your account has been open for at least 5 years, you can withdraw from contributions without penalty, no matter how old you are.

If you are under 59 ½ and need to use more than $10,000 from your Roth IRA to buy a home, any withdrawals from earnings are considered an early withdrawal and be penalized at 10%.

When you invest in tax liens, earnings come from the interest applied to the lien

Can You Use a Roth IRA to Buy a House?

Yes, you can use a Roth IRA to buy a house, but only in one of two ways: By making a withdrawal from the account or by rolling some or all of the funds into a self-directed IRA.  Unlike other retirement accounts, like 401(k)s, you cannot take a loan against your IRA to buy a house.

Which option is best for you depends entirely on how you plan to use the home.

Option #1: Withdraw from your account

If you intend to live in or otherwise use the home you want to buy, taking a withdrawal is the only way you can use money from your Roth IRA to buy a house. The same is true if you intend to let your immediate family, such as a parent, child, or spouse, use the property.

Remember that withdrawing from your Roth IRA, though possible, can be costly. Depending on your age, you may incur a penalty and miss out on the compound interest you may have earned if the funds remained in the account.

Before you decide to use money from your Roth IRA to buy a house, determine how a withdrawal will impact your retirement and evaluate other options, such as mortgages or borrowing from a qualified retirement account, like a 401(k).

Option #2: Rollover to a Self-Directed IRA (Investment Properties Only)

If you intend to buy an investment property using your IRA, your best option is to roll money from your existing Roth IRA to a self-directed IRA (SDIRA).

Current IRA regulations prevent account holders from holding real estate in standard IRA accounts.  On the other hand, SDIRAs can hold alternative assets, including real estate.  Any earnings made from the property, such as rent or capital gains after a sale, go directly back to the Roth IRA. Over time, this can be a lucrative and highly efficient way to build your retirement.

This is not an option if you or anyone considered a disqualified person wants to live in or use the property.  IRS Prohibited Transaction rules prevent IRA holders as well as their ascendents, descendants, spouses, account fiduciaries, and other key individuals from directly benefiting from IRA-held property.

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Pros and Cons of Using a Roth IRA to Buy a House

Thinking about using your Roth IRA to buy a home? Review these drawbacks and benefits to determine if it’s the right move.

Pro

  • First-time home buyers can take out up to $10,000 without penalty.
  • As long as the account is open for at least five years, withdrawals from contributions are not penalized.
  • If purchasing an investment property, rolling funds into a self-directed Roth IRA can lead to lucrative earnings.
  • Real estate held in an SDIRA can diversify your portfolio and hedge against market volatility.

Cons

  • Early withdrawals that exceed $10,000 may be subject to a 10% penalty.
  • If you use an SDIRA to purchase the property, you and any other disqualified individuals are not permitted to live in or otherwise use the property.
  • Withdrawing from your Roth IRA can negatively affect your retirement and cause you to miss out on compound interest earnings.

There you have it. Purchasing a home with a Roth IRA is certainly possible, but it does require familiarity with IRS rules to avoid penalties.

FAQs

What are the rules for using a Roth IRA to buy a house?

If you’re a first-time home buyer, you can withdraw up to $10,000 from your Roth IRA without penalty. Withdrawals beyond that may be subject to a 10% penalty depending on your age, the age of the account, and whether the withdrawal is from contributions or earnings.

If you’re using a self-directed Roth IRA to purchase the home, the home is considered an investment property. In that case, you cannot live in or otherwise use the home.

Can I withdraw funds from my Roth IRA for a first-time home purchase?

Yes, you can withdraw up to $10,000 without penalty if you’re using those funds to purchase your first home. The $10,000 exception is a one-time exception. If you’re under the age of 59 ½, anything beyond $10,000 is considered an early withdrawal and may be subject to a 10% penalty.

What qualifies as a first-time homebuyer under Roth IRA rules?

You’re considered a first-time home buyer if you have not owned a primary residence for at least two years prior to the withdrawal. If you’re married, your spouse must also meet the qualifications. That means even if a home is in only one spouse’s name, the other would not be considered a homeowner if they purchased the next house in their name.

Is there a limit on how much I can withdraw from my Roth IRA for a home purchase?

If you are a first-time home buyer, you can take out up to $10,000 to purchase a home. After that, withdrawals, though not limited, may be subject to a 10% penalty if you’re under the age of 59 ½.  Note that withdrawals from contributions are not subject to penalty as long as the account is open for at least five years.