Roth IRA for down payment of future home?

[Guest sevynomis]

Hi. I am looking for advice on my next savings strategy in general and specifically if opening a Roth intentionally to save money for a future home is a good idea.

I am 23 year-old female. My income is $36,000. I currently contribute 8% to my company's 401K to get the maximum 4% match.

I opened an ING Orange Savings account six months ago and have managed to put $1,000 into it without making any real modifications to lifestyle/spending habits other than becoming educated on how money works (i.e. getting rid of credit cards, paying bills electronically/automatically to avoid late charges, consolidating student loans, etc...) I have made a commitment not to make any withdrawals from my Orange account and have not done so since opening it.

I think that with some changes to spending habits and some creative budgeting, I have the ability to save even more. My next two savings priorities are: 1) Open a Roth IRA 2) Save money for down payment on a house. I am attempting to kill two birds with one stone.

I currently rent a shared two-bedroom apartment with a roommate. Buying a house is somewhat long term (five to ten years away) at this point, since there are still too many variables in my life. Will I have enough of a down payment? Will I go back to school for an advanced degree? Will I change my job? Will I stay within my industry? Will I move out of state? Will I get into a serious relationship that changes my perspective? Etc...

I am looking to open a Roth IRA with the intention of using some of the money later on for down payment on buying a house. I figure that in five years time, I can take advantage of penalty-free first time homebuyer withdrawal. I have done research on the value of a Roth IRA and have decided to open one no matter what and would continue to contribute money to it towards retirement even If I do buy a home. For now, I am hoping to put $2,000 to $4,000 in a Roth for the 2006 tax year depending on how aggressively I can save. I would put even more money in the next few years as my modest salary goes up.

My question is: Is it a god idea to open a Roth and plan to use some of the money for purchasing a home? What are the possible problems with doing this? Should I keep down payment and retirement away from each other? Is there another, better savings vehicle for saving money for a home within my time frame? Another savings account, perhaps? My position is: I am in no hurry to purchase a house, but I know that it is something I will have to address eventually.

Sorry for the long and wordy post. I wanted to give as much details as possible. I appreciate any replies. Thanks, in advance.

[John G]

There are too many "Will I..." 's in your life. Besides education and home buying, a fundamental issue you have not addressed is any "rainy day" or contingency fund.

The Roth approach is a reasonable choice after you max out the 401K match. Yes, you can use funds from a Roth for a first time home purchase.... but you also can withdraw contributions without penalty (note contributions, different rules apply to gains). You might want to start a systematic program of investments automatically drawn from your checking account each month - a combination of "pay yourself first" and "dollar cost averaging".

It is great to have the discipline to save part of your salary every year. Part of that process is not letting your life style demands get out of control. Its great to have fun in your 20s.... and fun does not have to mean spending lots of money.

One final thought on the house buying goal. Folks in their 20s often move too much for home ownship to make financial sense. You also end up spending a lot of weekends on home chores. Don't be in a rush to be a buyer. Renting for a number of years may make more sense.