How To Buy Real Estate With A Roth Ira

A Roth individual retirement account (IRA) is primarily intended as a long-term investment vehicle, but there are a few exceptions in which the Roth can be utilized for other essential purchases. One of those is the purchase of a new home, if you qualify as a first-time home buyer. You are permitted to take up to $10,000 from your Roth IRA without penalty to put towards a down payment on a home. And if you wisely use this free $10,000 to withdraw earnings from interest, you can take out even more as contributions.

Step 1

Meet with your financial adviser or Roth IRA account manager and discuss your intent to purchase a home. Confirm that you are an eligible first-time home buyer. Even if you have owned a home in the past, you might still qualify as a first-time home buyer. This is defined as anyone who has not owned a home in the past two years. You will also need to have a Roth IRA account that's at least five years old before you can make this type of withdrawal.

Step 2

Determine whether your spouse or co-signer has an eligible Roth IRA they can use to make a down payment. If so, you can put up to $20,000 tax- and penalty-free towards your home.

Step 3

Make a withdrawal of funds from your account, stipulating they are to be used for the purposes of buying a home. You will have the desired cash amount either mailed as a check or deposited directly into a checking account.

Step 4

Use the funds to purchase a home within 120 days of receiving them. If you wait beyond this point to make a home purchase, it no longer qualifies as a qualifying withdrawal. Since it becomes a non-qualifying withdrawal, you will be forced to pay the 10 percent penalty fee as well as income tax.

Tips and Warnings

If you want to use even more of your Roth IRA for a down payment, request that the $10,000 withdrawn come from earnings before contributions. Because contributions have already had taxes paid on them, they are not eligible again, and they are also safe from any penalty fees, so you can withdraw additional contributions to apply to a down payment. Your account manager may have you divide these withdrawals up into two transactions to make this division of funds clearer.