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Borrow From Retirement to Pay for a Home?

Dave is a huge fan of Roth IRAs for retirement investing mainly because of their tax-free benefits and flexibility. But the Roth also includes provisions that allow you to withdraw money from your account. While this might sound convenient, taking money from your Roth IRA is a terrible move.

The $300,000 Down Payment

Roth IRA owners can withdraw up to $10,000 for a first-time home purchase. But doing that can damage your finances in a couple of ways:

  • Obviously, it will take away from what you could have saved for retirement. A lump sum of $10,000 can grow to $300,000 if it’s invested for 30 years. Think of it this way: You’re not taking $10,000 from your account. You’re taking $300,000 from your retirement.
  • Using money from your Roth IRA for a down payment on a home could also set you up for disaster. It would be tempting to use that $10,000 to buy a more expensive home—one that you can’t truly afford and still be able to save for retirement, college, etc.

Dangerous Ground

Technically, you can withdraw the money you put into your Roth IRA tax- and penalty-free at any time. You can even withdraw your earnings as long as your account is at least five years old and you meet certain qualifying circumstances. Some of those include hardships such as disability or paying medical insurance premiums when you’re unemployed.

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While it might give you some peace of mind knowing that if push comes to shove, you can access your Roth IRA funds, it’s a bad idea to treat your retirement savings like a huge emergency fund.

If you follow Dave’s Baby Steps, you know you should have an emergency fund of 3–6 months of expenses saved before you start investing. That way you can keep your retirement money invested for retirement and still be prepared for life’s little surprises.

Don’t Make a Huge Decision Without Professional Advice

Are you thinking of using money from your retirement account to buy a home? Don’t do it without considerable thought and help. One of Dave’s investing Endorsed Local Providers (ELPs) can help you examine the pros and cons so you can understand the consequences of your decision before you have to live with them. Find your ELP today!

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