Dear Penny: Should I Use My Savings or Roth IRA to Buy First Home?

A same-sex couple drink tea as they sit on the living room floor of their new home.
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Dear Penny,

I've been shopping around with my partner to buy our first home.

We have two types of homes in mind: one that's affordable so that we can put a big down payment on and have very low monthly payments, or a home that checks all our boxes that's more expensive but gives us room to grow. We'll likely put down the same nominal amount of money for either option.

That said, I'm wondering what's the best way to fund the down payment, given that I have a Roth IRA and a fair amount in a savings account. Is there a golden ratio?

P.S. I have a 401(k) too, but my instinct is to not touch that for the down payment.


Dear A.,

There’s no magic ratio here. And as someone who’s hoping to eventually buy a home, I wish there was.

The personal finance business loves its rules of thumbs: Save 15% for retirement, always put 20% down. All those rules make it easy to think there’s some magic in those numbers. Save X% and it’s 100% guaranteed you’ll never run into financial trouble.

Here’s the thing, though: The idea that there’s a single magic number that will work for everyone is utter nonsense. But it’s more satisfying to make up a blanket number that works for everyone than it is to shrug our shoulders and say, “Depends on your situation.”

Homeownership still makes sense for most people who can afford it, so I’ll preface what I’m about to say that I fully support your decision to buy a home. 

Renting often gets dissed as throwing away money each month. But it’s easy to forget that when you rent, you’re buying the ability to easily pick up and move if you need to. It buys you the right to make sure expensive repairs will be someone else’s problem.

So my first question is this: How much money do you need in your savings account to feel like you could cover an emergency? Because whatever that amount is for you as a renter, you’re probably going to want to increase that as a homeowner.

While I’m not a fan of most rules of thumb, there are a few exceptions. One that does make sense is that we should all aim to have at least three months of living expenses in a savings account — especially given the shakiness of our economy.

That isn’t going to be realistic advice for everyone. But since it sounds like you’re well-established and you’re taking the big leap of buying a home, that’s a minimum to shoot for.

If you don’t have that three-month emergency savings, I’d keep saving before buying a home.

Otherwise, leave your three months’ savings in place and only take out what you have above that amount for a down payment. 

So let’s say your living expenses are $3,000 a month and you have $11,000 in your savings account. You’re trying to make a $7,000 down payment. I’d take $2,000 from the savings account so that you still have your emergency fund and the remaining $5,000 from your Roth IRA.

Your Roth IRA contributions are yours to withdraw tax- and penalty-free at any time. You can also withdraw up to $10,000 worth of earnings over your lifetime for a first-time home purchase, provided that you’ve had the account for at least five years. But the IRS defines “first-time homebuyer” as “hasn’t owned a home in at least two years.”

It sounds like you and your partner are fairly young, though, so I’m guessing this won’t be necessary. Often at this stage of life, your Roth IRA consists mostly of your contributions. 

If you can’t come up with a down payment using both of your savings and Roth contributions, consider it a warning sign that you may be buying too much house. Down payments are more affordable than ever, with many first-time homebuyers choosing FHA loans that require just 3.5%.

And if the two of you are the kind of super-savers who could fund a down payment from your savings while maintaining a healthy emergency fund? Take it all from your savings without touching your Roths.

You didn’t ask me for advice about which house to pick, but I’ll give you some anyway. Homeownership is almost always more expensive than people expect. So focus on the affordable aspect, even if that means your starter home won’t be your dream home.

Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder. Send your tricky money questions to [email protected].