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Buy Your First Home with a Roth IRA

November 7th, 2007 at 10:15 am

Thanks to the present financial crisis that began with the proliferation of “sub-prime” mortgages, housing prices are dropping and mortgages are getting harder to obtain, even for people with a good credit history. If you are wondering if you will ever be able to buy your first home, you may want to consider the benefits of saving for it by using a Roth IRA.

If you are single, with an Adjusted Gross Income (AGI) of under $99,000, or married (filing jointly) with an AGI of under $156,000, you may contribute up to $4,000 of your income to a Roth IRA. In 2008, the maximum Roth IRA contribution will be $5,000. While your contribution does not lower your immediate taxes owed, it can literally open the door to owning your first home.

Let’s assume that you would like to buy a house in the next 5 years. In 2007, you contribute $4,000 to a Roth IRA. In 2008 -2011, you contribute $5,000 each year. At the end of 5 years, assuming an 8% return on your Roth IRA investments, the $24,000 that you have invested will have grown to over $30,000.

With a Roth IRA that has been established for at least five years, you are allowed to withdraw up to $10,000, in income and growth, plus all of your contributions, when the proceeds are used to buy a first home. In the example above, all $30,000 can be withdrawn to purchase a first home, without any income tax or penalties.

This approach will allow you to make a 10% down payment on a $300,000 house. If the remaining $270,000 is financed with a 30 year mortgage with a 6% annual interest rate, your monthly payments would be approximately $1,620 (plus taxes and insurance). While this approach takes patience, it may allow you to become a home owner, building up equity in your future, while your friends are still renting.

4 Responses to “Buy Your First Home with a Roth IRA”

  1. Broken Arrow Says:

    I think it should come with a caveat not to do this if it will compromise the money that is set aside for retirement.

    I also think it would be ideal to set aside enough to pay roughly 20% in order avoid PMI.

    In any case, thank you for a good explanation of using the Roth IRA to save towards a house purchase. Smile

  2. finabguide Says:

    I agree with you on both counts.

    This entry is aimed mainly at twenty somethings who are trying to figure out how to save for their first house. I have 2 children in that category.

    While I would hope that they could put 20% down and not pay PMI, many young people will not be able to save that much before they wish to buy a home.

  3. Russ Says:

    Great Idea for Buying First House. The domain BuyFirst.com is available for sale to a company who in that business and is looking for traffic.

  4. studenthowtobuyarothira Says:

    Great idea. Now I need to know how to open a roth ira.

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