Jun 15 2010

Opening an IRA to maybe (not) use for a down payment

I’ve mentioned that we put all of our retirement savings in Shane’s Roth 401k at his work. Sometimes, someone will comment that it’s better to just put enough in the 401k to get the full employer’s match, and put the rest in the IRA. I never really tried to figure out why, though.

You can contribute $5,000 per year to an Individual Retirement Account. You can contribute up to $16,500 to a 401k in 2010.

I’m in the really early stages of researching IRAs.

But wanna know something that I wish I knew a little earlier? First-time homebuyers can withdraw up to $10,000 from an IRA to use toward a down payment on a house. If your spouse also is a first-time homebuyer, s/he can also withdraw $10k from an IRA — so yep that’s $20k.

So what’s the catch? Well, you’re decreasing your potential retirement earnings. That $10k could have multiplied several times over by the time you’d withdraw it as a retiree.

If you’re merely withdrawing your Roth IRA contributions, you don’t have to pay tax or penalties on that — but if you wanted to withdraw the earnings as well, it’s a little different. There’s some more complicated stipulations on various IRAs and how you do it. So do your own research.

Some people argue that owning a house free and clear is an important part of the overall retirement financial life. It’s harder to retire if you still have a mortgage, ya know?

We are setting up an IRA now, in case we want to withdraw some money to use toward our down payment.

We might not use any of the IRA for a down payment at all. I don’t think we will.

But we think it would be a good idea to make the funds available to us and decide on that option later. Or if some huge calamity strikes and we exhaust our emergency savings and we need some additional backup, it would be nice to be able to tap our IRA contributions without the same kind of penalties that we’d face with the 401k. It IS our money, after all.

We will do all we can to save up 10% + closing costs the regular way — just saving money and selling stuff we no longer want.

So, we’re decreasing Shane’s 401k contributions from 15% down to 6%. That’s enough to get the full company match, which effectively is 3%. The other 9% will go into an IRA. We don’t yet know if we’ll want another Roth option or if we’d do traditional with it.

For more info on the topic, check out this article from Kiplinger’s, and this one from Bankrate.

Do you have an IRA? How did you pick it? And have you used IRA contributions toward a house? Thoughts on this?



6 Responses to “Opening an IRA to maybe (not) use for a down payment”

  1. My husband and I both have Roth IRAs. My reasoning is that the 401k money is pre-tax and the Roth money is after tax, so when we retire, we’ll have the option to pull out of either or a little of both, to maximize our tax benefit.

    I luckily haven’t needed to use IRA contributions toward a house, but I really do like that extra cushion of knowing that we can take our Roth contributions back out in the event of an extreme emergency (without having to pay the 10% penalty of a traditional IRA).

    I would have no qualms at all about saving house money in a Roth as long as it isn’t keeping you from also meeting your retirement goals. :)
    .-= Becky´s last blog ..30 Weeks! =-.

  2. If I read the lit correctly the money has to have been in the account for 5 years before you can take it out to use as a downpayment.

  3. Marie — that’s for the Roth IRA. The traditional IRA is different. I think?

  4. I’m pretty sure you can take Roth contributions out at ANY time, but I should double-check that at work tomorrow!
    .-= Becky´s last blog ..30 Weeks! =-.

  5. I would look into the tax advantages for Roth IRA. We’re going to be transferring our retirement accounts into one because it makes more sense to pay today’s taxes on a smaller amount than tomorrow’s taxes on a larger amount.
    .-= megscole64´s last blog ..What Do You Think? =-.

  6. I do think there are some great benefits of the Roth IRA. But I do want to mention again — Shane’s 401k is actually a Roth 401k, so we’ve paid taxes on that money already. We don’t know if we wanna do the exact same for the IRA or what but it’s something we’ll research!

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Hey! I'm Kacie, wife to Shane and mother to Jonathan (7), Vivienne (5) and Amelia (2) . I write about my family's finance: how we save money, improve our spending, and plan for the future.

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