The Writer’s Coin

I’ve been contributing (fully) to my Roth IRA account for a little over three years. At the end of this year, I’ll have around $16,000 total in my Roth IRA. Now that M and I are married and our current lease is up in August, we’re thinking about buying a place. So we’re doing all the preliminary exploration that everyone does when thinking about buying a new place. And that means figuring out how much money we have to put towards a down payment.

For the uninitiated, a bigger down payment means a few things (and anyone else who’s done this before, please feel free to chime in), but the gist is you can afford a nicer place for a smaller mortgage at a lower rate. So you want to have as much money as you can to put down. And these days some lenders won’t even give you a loan if you can’t put down 20% of the total cost, which for an average place in the Chicago area is somewhere around $55,000.

So as we tally up how much money we have to put towards this huge expense, I naturally started thinking about my Roth IRA. Why? Well, we don’t have $55,000 laying around. Turns out that one of the conditions under which you can withdraw money from this account (without a penalty) is if you’re putting it towards your “first house.” There is a lot of literature out there about borrowing from your 401(k) to pay bills (it’s a bad idea), but this is a little different. The rules are also a little different.

I researched the hell out of this one and came up with all the different rules and technicalities behind putting some money from a Roth IRA towards a first home, and I was still a little confused. So it was great to find Five Cent Nickel’s post about doing this very thing. He’s already done it and the comments have sparked a great debate about whether or not this is a good idea.

Turns out he did what I’m thinking of doing myself: putting money away into a Roth account with the idea that, if I need that money for down payment help, I can use it. Instead of putting it away in an ING account earning a fixed 3%, I have it in the market, which is a little riskier. It’s going in there with the idea that it’ll be funding my retirement, but it’s also giving me the flexibility of helping me out with my down payment if I want to make that call.

So part of me wants to take advantage of all the saving I’ve done over the past few years to get be as responsible a home buyer as we can (i.e. put as big a down payment as we can). When I include this money in our “for down payment” pile it means we come pretty close to 20% on the “average” house we would want. Without it, we’re not even close. So it’s basically a choice between not raiding the Roth IRA account or buying a house without putting down the “responsible” 20%. What’s a first-time home buyer to do?

The other part of me is firmly against this. Interrupting the magic of compound interest is the last thing I want to do, especially since I’m still in my twenties and I want that money to sit there and grow for as long as I possibly can. I can tell myself that I’ll fully contribute to the Roth from here on out so it won’t matter much. Or that I’ll have a higher salary in the future. Or a whole bunch of other stuff that ignores the idea that I’m taking money that was meant for M and I to have a comfortable retirement and putting it towards a house that we probably won’t be living in 5–10 years from now.

There is, however, a third option. We could rent for another year and turn up the savings with the goal of saving up even more than 20%. Then we’d be in the driver’s seat and we wouldn’t be touching our retirement accounts. This is a very real possibility since we haven’t even started looking, gotten our credit scores, or any of the preliminary steps to buying a house. So far it’s just been talk. We feel like we just got married (we did, two weeks ago) and not having to worry about all that stuff is great — we finally have time to just chill out and enjoy our summer. So part of me wants to wait and not embark on such a huge project just yet.

But housing prices are good right now. Interest rates are low. There may not be a better time to buy than right now.

What do you think? Any advice from the home buyers out there?

Tags: buying a house, down payment, Roth IRA