Early withdrawl from Roth for down payment on house

[Guest swing]

My spouse and I are in a high income bracket ($120K AGI), but we have hardley any deductions, making our taxes really high ($15K). We are planning on buying a new house in the next 1-3 years.

We are also planning on contributing the max to Roth IRA's until we are ready to buy a house, which will lower our taxes approx $2200 a year. We will then take out the contributions we make and use these funds as part of a down payment. It is my understanding that this money will not be subjected to the early withdrawl penalty or earnings taxes (withdrawing contributions only). I do realize that I will have to report the withdrawl as income, but this will be offset by the reductions in taxes from closing costs, property taxes, mortgage interest, etc. And, while we are waiting to buy the new house, this money grows tax free. We already contribute more than enough to our 401k's so saving this money for retirement is not an issue. We are simpling looking for the best way to lower our taxes and save for a large down payment.

Can anyone give me any reason as to why this is not a good plan?

Thanks for any advice!

[papogi]

With your income level, you get no tax credit for contributing to a Roth IRA, so I'm not certain what tax breaks you are getting by contributing to the Roth (funded by post-tax dollars). If you are talking about a traditional IRA, then, yes, you could be getting some deduction for your IRA contribution (depending on other factors like whether you participate in a company 401k, but it appears that you do, so there should be no deductibility based on your income). If that is the case, then you can take traditional IRA money out for a house down payment and not pay the penalty, but you'll still owe income tax if they represent deductible contributions. You'll owe no income taxes for nondeductible contributions. I guess I don't see the advantage here, but maybe I'm missing something.