Saving for a first home with a Roth IRA

[Guest Darcy]

My question is in regards to saving to buy a house. Is there a way that this can be done with a Roth IRA to save for a down payment? I thought that I read an article that described such an account, similar to saving for college education for your children. I just have not been able to get any further information and any leads will help.

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Thanks - Darcy

[Guest Goodnews]

Darcy -

Currently, the Roth IRA allows for a one time $10,000 tax-free distribution from your Roth IRA account for the purchase of a home for FIRST time home-buyers. However, there are a few restrictions. The $10,000 withdrawal has to come from contributions made by the individual, not from the earnings made by the contributions. Thus, you must have at least 5 years of contributing $2,000 to the account before you can make the withdrawal.

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Goodnews

[Guest mcdonnell]

Contributions can be withdrawn tax-free at any time for any reason. The $10,000 exception applies to withdrawals of earnings after 5 years.

[John G]

This may be an option, but it is probably not a good idea. The high value of a Roth comes from putting money in and keeping it there. Congress can kill future Roth contributions, your income in the future may disqualify you, your ability to set aside the funds may erode when a spouse stops working or when college expenses hit. Use the shelter while it is there and then keep its full value by avoiding any of the "gimick" withdrawal options. It is not the lack of a penalty or tax now that should concern you but the dimished value over multiple decades of the Roth tax shelter.

I'm all for homeownership. But, think of other alternatives before tapping into a Roth. Buy a smaller house, wait a few years, "borrow" the DP from relatives, etc.

[This message has been edited by John G (edited 06-23-99).]

[Guest ruggerjay]

On the topic of homebuying with your Roth IRA, I was wondering if you could return the amount you borrowed (say $10,000) to your account without penalty? Sort of get around the $2000/year limit.

Also, can you take money out for a certain amount of time without penalty. With some accounts it is possible for 60 days to give yourself a personal loan of sorts or while moving money from one account to another.

If you know the answer to any of these please post.

Thanks,

Jennifer