Personal Finance

A Roth IRA may help fund your home purchase. Here are the pros and cons

Key Points
  • Your direct contributions to a Roth IRA can be withdrawn at any time for any reason.
  • If you meet certain requirements, you can also use up to $10,000 in earnings toward the purchase of a home without facing taxes or penalties.
  • While home prices continue climbing, the cost of borrowing is relatively cheap due to historically low interest rates.
Siri Stafford | Getty Images

You probably know a Roth individual retirement account is one way to save for your post-working years. 

It also may come in handy for certain homebuyers.

Basically, up to $10,000 in Roth IRA earnings can be withdrawn — free of both taxes and penalty — for a home purchase if you meet certain requirements. That's in addition to being allowed to withdraw your direct contributions at any time, because you already paid taxes on that money.

As home prices continue their upward trajectory, the amount of cash needed to purchase one continues to rise, as well. While it's possible to buy a house with less than 20% down — the average is 12% overall and 6% for first-time buyers — going that route also might mean paying private mortgage insurance, or PMI, until your equity is at least 20% of the home's value. PMI can run $30 to $70 monthly for each $100,000 borrowed, according to Freddie Mac.

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For a $250,000 house, a 6% down payment would be $15,000. At 20%, it would be $50,000. Those amounts don't include other costs related to closing on the purchase, such as transfer taxes or points, which generally lower the interest rate on the loan. (One point is equal to 1% of the mortgage). 

At the same time, the cost of borrowing is relatively cheap due to historically low interest rates. The average rate on a conventional 30-year mortgage was just under 3% last week, according to

Nevertheless, using Roth IRA money to buy a house is not a strategy that makes sense for everyone. Here's what to consider.

The basic rules

With a Roth IRA, your contributions are made after-tax. This means you can withdraw that money at any time without penalty. The 2020 contribution limit is $6,000 ($7,000 if you are age 50 or older).

To make contributions at all, though, your modified adjusted gross income can't be above a certain amount. To contribute the maximum, that income cap is $124,000 if your tax filing status is single, and $196,000 for married couples who file jointly. Above those income amounts, the contribution limit is reduced until completely phasing out at income of $139,000 for single tax filers and $206,000 for joint filers.

While those contributions are yours whenever you want them, the same can't be said for any growth in the account. Unless you meet an exclusion — such as reaching age 59½ and having owned a Roth IRA for at least five years — withdrawing earnings will generate taxes and a 10% penalty.

Roth IRA limits for 2020

Single Filers (MAGI) Married Filing Jointly (MAGI) Married Filing Separately (MAGI) Maximum Contribution for individuals under age 50 Maximum Contribution for individuals age 50 and older
under $124,000under $196,000$0 $6,000 $7,000
$125,500 $197,000 $1,000 $5,400 $6,300
$127,000 $198,000 $2,000 $4,800 $5,600
$128,500 $199,000 $3,000 $4,200 $4,900
$130,000 $200,000 $4,000 $3,600 $4,200
$131,500 $201,000 $5,000 $3,000 $3,500
$133,000 $202,000 $6,000 $2,400 $2,800
$134,500 $203,000 $7,000 $1,800 $2,100
$136,000 $204,000 $8,000 $1,200 $1,400
$137,500 $205,000 $9,000 $600 $700
$139,000 & over$206,000 & over$10,000 & over$0 $0


Another exclusion from the 10% penalty is when the earnings are used for a qualified first-time home purchase. However, to avoid taxes on the earnings, you must have held the Roth IRA for at least five years (with some exceptions related to the timing of contributions).

For Roth conversions — that is, money moved from another retirement account to a Roth IRA — you generally must hold the account for five years if you're under age 59½ to avoid the 10% penalty on any withdrawals (unless you meet the first-time-home-buyer exclusion).

The qualified home purchase is for first-time home buyers or people who haven't owned a house as their primary residence in at least two years. The buyer can be you, your spouse or one of your family members.

Why home prices may continue to push higher
Why home prices may continue to push higher

The withdrawal also must be used within 120 days of the distribution and be used to pay for expenses related directly to the home purchase, such as a down payment or other closing costs. And, the $10,000 earnings exclusion is a lifetime limit.

Traditional IRAs also come with the penalty-free exclusion for qualified home purchases. However, the $10,000 limit is applied to the entire withdrawal, said certified financial planner and CPA Jeffrey Levine, director of advanced planning at Buckingham Wealth Partners in Long Island, New York. And, you'd generally pay taxes on the money.

Setting up a Roth IRA for a home purchase

The flexibility of a Roth might make it a good place to save up to buy a house down the road, some advisors say. 

"We've long suggested that young people use a Roth IRA to save the considerable amount needed for a first-time home purchase," said CFP Daniel Galli, principal of Daniel J. Galli & Associates in Norwell, Massachusetts.

"As long as we can meet the five-year rule, they can use all contributions plus up to $10,000 of gain, free of tax and penalty," Galli said. 

However, he said that he has recommended this strategy to young workers who also are saving for retirement through a 401(k) plan at work.