The pandemic has thrown the global housing market into a seller’s paradise. With home inventory at an all-time low, first-time homebuyers are falling short in massive bidding wars. But should you tap into your Roth IRA to help pay for a home and win the battle? Here are some pros and cons to consider.
Why is the Housing Market so Competitive Right now?
For home sellers, the housing market has never been better. According to Zillow, over 22% of homes are currently going over their asking price. But for homebuyers, the effect is quite the opposite – with many first-time buyers finding themselves in the dust of competitive deals. Here are a few causes contributing to the housing shift.
From lockdowns to health and economic concerns, many homeowners are wary to put their homes on the market right now. As a result, inventory is significantly lower than normal.
In addition to pandemic uncertainty, people are staying in their homes longer. One reason is due to fear surrounding possible COVID-19 exposure in a home showing. Furthermore, even if a homeowner does want to sell, the lack of available housing doesn’t supply them with anywhere to go – adding fuel to the low inventory fire.
On top of the all-time low inventory, mortgage rates are also at an all-time low. With interest rates as low as 3% or below, hopeful buyers have even more incentive to jump on the market. Thus, creating more demand.
With many companies now conducting work remotely, a person’s home has never been more important. Our place of residence has quickly transformed from a house to an office, a school, a play place, and our main source of, well… just about everything.
What is a Roth IRA?
A Roth IRA is a retirement investment account funded with pre-taxed money. For example, if you receive a paycheck that already has the required taxes taken out, you could take any take-home amount from that paycheck (up to the maximum annual limit) and invest it into a Roth IRA. If you choose to later make a qualifying withdrawal on your principle, you will be taking funds that have already been taxed and will not be taxed again. The benefit of a Roth IRA is that you are taxed now, which depending on a variety of circumstances, could be at a lower tax rate than that of the future.
Should You Consider Using Your Roth IRA to Pay for a Home?
While some borrowers with exceptional credit scores can take out a mortgage that covers the majority of the price of a home; those without such good credit must often come up with a large down payment as high as 20 percent of the home’s price. Your credit scores will also help determine the mortgage terms – if any, you may be offered. To find out where your credit stands for a home purchase, click below to access your $0 credit score.
Whether it’s a credit-based loan denial, not qualifying for the full loan amount, or simply because you don’t want to add a down payment to your mortgage, many buyers turn to their Roth IRA to help fund the purchase. Here are some important things that you should consider before tapping your Roth IRA to buy a new house.
Pros of Using Your Roth IRA for a Home Purchase
Since contributions to a Roth IRA aren’t tax-deductible, you are allowed to withdraw your contributions anytime, penalty-free. However, if you withdraw before the age of 59 and a half, you may be taxed on your Roth IRA’s earnings unless it goes towards a qualifying event – such as a first-time home purchase.
For example, let’s say that you’ve contributed $50,000 to a Roth account. Then, you could use up to $50,000 toward the down payment on your new home.
In addition to using your contributions to help purchase a house, if you are a first-time homebuyer, you are allowed to withdraw up to $10,000 in earnings from your Roth IRA as well. That could be beneficial if you need to come up with a large sum of money for a down payment. But you must once again consider the impact that it will have on your retirement savings. This is especially important if you don’t have any other retirement plans.
Cons of Using Your Roth IRA for a Home Purchase
Alternatively, the downside of withdrawing money from your IRA is that you are reducing the amount of money that you are saving for retirement. If you are unable to put the money back in your Roth, you could end up hurting financially after you retire. Therefore, you need to consider whether buying a new house now is worth having potentially less money available when you retire.
Moreover, if you have the money saved to cover a down payment, or you qualify for a large mortgage, you might be better off if you don’t use your Roth IRA to help pay for a home. Especially with mortgage interest rates at an all-time low, you may want to consider borrowing the money instead. Furthermore, mortgage interest is tax-deductible for most homebuyers.
If you are in the market for a new home, it can be tempting to use money from your Roth IRA to help purchase it. You are allowed to withdraw your contributions at any time without getting hit with any tax penalties. Additionally, if you are a first-time homebuyer, you can use up to $10,000 in earnings towards the purchase of your home. But if interest rates are low, you should consider whether it makes more sense to borrower the money – instead of tapping into your IRA. If you are unsure about what to do, you should consult a financial advisor to help you determine the best option for you.
Resources: [https://www.zillow.com/research/home-sales-above-list-price-2020-28328/] [https://www.cnn.com/2020/08/06/success/mortgage-rates-record-low august/index.html] [https://money.cnn.com/retirement/guide/IRA_Roth.moneymag/index5.htm]
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