3 Hidden Benefits of a Roth IRA

Source: Thinkstock

Source: Thinkstock

A lot of people only think of their Roth IRA as a retirement vehicle. Put money in now, take it out after age 59 ½, right? However, there are a few other hidden opportunities for you to use the money in your Roth IRA before retirement. Ready to make a down payment on a first home? Need to pay off medical expenses? Turning to your Roth IRA might just be the solution.

Housing Down Payments

Ready to buy your first home? Considering building a first home? Thanks to the 1997 Taxpayer Relief Act, you are now able to receive a Roth IRA distribution of up to $10,000 to use on first home down payment or building expenses.

You may be required to pay taxes on your withdrawal, depending on what percentage of your withdrawal counts as earnings as well as how long you’ve had the Roth IRA, but you will not carry the burden of the 10 percent early distribution penalty.

This is a great hidden benefit for anyone who is hoping to offset some of the costs of buying or building a first home. Want another hidden benefit? Well, as US News notes, it doesn’t even have to be your home:

IRA distributions can be used to cover home buying/building expenses for your spouse, child or grandchild, or your spouse’s child or grandchild. The $10,000 distribution is a lifetime limit (so you can’t take out $10K for your home and $10K for your grandchild’s home), and there are specific guidelines about who counts as a “first-time homebuyer.” Here’s US News again:

The IRS rule says that as long as you haven’t had financial interest in a home in the past two years before the date you’re closing on your new home, you’re technically a first-time home buyer. So if you sold your last home on Oct. 1, 2011, and haven’t owned a home since then, you could use the funds in your IRA to put a down payment on a home that you sign a contract for any time after Oct. 1, 2013.

You also need to ensure you spend your Roth IRA distribution funds on qualified home-related expenses no later than 120 days after your Roth IRA distribution.

[caption id="attachment_662165" align="aligncenter" width="640"]Source: Thinkstock Source: Thinkstock[/caption]

Medical Expenses

Nobody wants to have so many medical expenses that they must dip into their retirement accounts to pay the costs. However, if you find yourself with more medical expenses than your current income, you might be able to take advantage of a hidden Roth IRA benefit.

If your medical expenses exceed 7.5 percent of your adjusted gross income, you have the option to distribute penalty-free funds out of your Roth IRA to pay the expenses. Make sure your expenses are qualified expenses before taking the distribution, and be aware that you may have to pay taxes on your distribution.

Educational Expenses

Believe it or not, it is possible to take penalty-free distributions against your Roth IRA to pay for qualified higher education expenses. Here’s what the IRS counts as qualified expenses:

These expenses are tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance. Room and board also count as qualified expenses in some cases.

You are entitled to take these distributions for your own educational expenses, as well as expenses of your spouse, your children, your spouse’s children, foster and adopted children, and other descendants. As with the other hidden benefits, make sure your expenses are qualified before you plan your distribution and be aware you may end up paying taxes on your distribution.


A final note on these hidden Roth IRA benefits: Although it is great to have the opportunity to spend some of your retirement savings on qualified expenses, be aware that you are withdrawing money from your own retirement fund. Distributing funds from your Roth IRA now, even for qualified expenses, may mean losing out on investment returns down the line and is likely to mean you’ll have less money available to you when you are ready to retire.

Written by Nicole Dieker. The views expressed herein are not intended to serve as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell securities by FutureAdvisor. Differences in account size, timing of transactions and market conditions prevailing at the time of investment may lead to different results, and clients may lose money. Past performance is not indicative of future results.

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