When people think about IRAs, they typically associate them with retirement. After all, that is what they were designed for. However, some investors don’t realize that funds from a Roth IRA can be used for other expenses that may arise before retirement. Below we will explain the three main categories people use their Roth IRA funds for besides retirement.
Student debt is now the second leading consumer debt category in the country, right after mortgage debt. The bill on student debt is even higher than for credit card or car loan debt! With the high interest rates student debt attracts, it can sometimes feel as if student loans will never be payed off.
Luckily, funds from a Roth IRA can be used to pay for school expenses, and some parents use their IRAs as a backup college fund for their child. If the child doesn’t attend college, or they have other means of paying for school, then the parents still have that money for their retirement. Although savers can pull contributions out penalty-free after the account has been open for 5 years, higher education expenses still count as a qualified distribution, so account owners don’t have to worry about paying a penalty if they don’t meet the distribution requirements. Funds can be used for the plan owner, their spouse, their children, or their grandchildren.
First-Time Home Purchase
Another exception for the early distribution rule is for first-time home purchases, builds, or rebuilds. If both spouses own an IRA and are both first-time home buyers, they could each pull $10,000 from their accounts for a total of $20,000 for their new home. The term “first-time home buyer” is slightly misleading, though. As long as one or both spouses have not owned a home for two years prior to the home purchase, they count as first-time home buyers. However, there is a $10,000 lifetime limit to this loophole for each individual, so buyers can’t take advantage of their retirement accounts forever.
Instead of contributing to a traditional savings fund, where the interest gained is pennies for every thousand dollars, some people use their Roth IRA as a place to hold and quickly grow an emergency fund. Roth IRAs typically have better returns than savings accounts, but it may take longer to receive the actual funds if an emergency arises. In this case, it’s wise to have 3-6 months’ worth of accessible funds available for short-notice emergencies and save the rest into a Roth. This way, you can still benefit from higher gains and have a bigger retirement account if you don’t end up using the funds in the Roth for an emergency.
While most financial advisors would recommend not touching retirement money until retirement, there are special circumstances that may cause one to consider using Roth funds for other purposes. Always consult a financial expert before moving money around or pulling from your Roth IRA to avoid any unnecessary penalties.