Using a Roth IRA to save for a down payment on a first home

[Guest Gregory Bell]

My wife and I own shares in a mutual fund earmarked for the downpayment on our first home. We don't expect to buy for five years. Question: does it make sense to transfer some of that money to a Roth IRA (understanding we will pay long term capital gains on the withdrawn amount), in order to realize some tax-free growth on at least part of our home fund? We already have Roth IRAs dedicated to retirement. Thanks for your input.

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Gregory Bell

[Kathy]

I know that there are those out there who will disagree with me on this but I say max out your Roth, max out your 401(k) and max out any other tax deferred savings/investment vehicles available to you!!! The more money you can keep for your self and out of Uncle Sam's pockets, the better off you are. We have already discussed in these message boards that I am using the Roth as another place to invest for my childrens' college educations. (hey, I've got to save money somewhere - why not the tax-deferred Roth????)

Two things to consider - 1. if you've already contributed some money to an IRA, you are limited to $2,000 per person to IRA contributions (or your earned income if less) and 2. Since you plan on spending the money in a relatively short period of time, you can't be too aggressive in your investment strategy. You will want to look at money market funds or similar investments in order to preserve your capital.

[Kathy]

One more thing - if you did your 1998 Roth contributions already, you can still do 1999 contributions now and start sheltering the earnings ASAP. If you turn out not to be eligible for 1999 when it is all said and done, you can always recharacterize by your tax return due date in 2000, (or maybe 1900 if you're not Y2K compliant yet).