Most people know that a Roth IRA is a great retirement investment if your income is below $110,000 if filing as a single person or if you and your spouse’s income is below $173,000 if married and filing jointly. What makes the Roth so attractive is that since you’re putting in after tax dollars, you can withdraw the money tax free in your retirement. But did you know there are several other perks to the Roth IRA and other ways you can use the money besides for your retirement?
Of course, you should be careful about withdrawing money from your Roth IRA before your retirement years, but in some cases, deciding to withdraw some of the money early may be a prudent decision. (The caveat is that you must have held your Roth IRA for 5 years, and you’re only allowed to withdraw the money you invested, not the interest you earned, to withdraw it penalty free.)
Other Ways You May Use Your Roth IRA Contributions
Here are some ways you can use that money:
1. For a down payment on your house. You’re allowed to withdraw $10,000 of your principal for a down payment on your house if this is your first house or you’ve not owned a house for the last two years. Your spouse can also withdraw $10,000, so as a couple, you can have $20,000 for your down payment. If you’d like to avoid private mortgage insurance (PMI), you must put 20% down on your home, and the Roth IRA can help you do this.
2. To pay for college education. You can withdraw your contributions to pay for your own or your child’s college education, penalty free. You can withdraw your money for the full amount of college tuition or until you exhaust your own contributions, or any amount in between. However, carefully consider this option. The money that you withdraw from your Roth IRA this year will count as income next year and could affect next year’s financial aid availability.
3. To pay unreimbursed medical expenses. If your out of pocket medical expenses add up to 7.5% or more of your gross adjusted income for the year, you can tap your Roth IRA contributions to pay those bills.
4. To pay for health insurance. If you are unemployed and paying for your own health insurance out of pocket, you can also dip into your Roth IRA to pay for this for at least 12 months.
Before Withdrawing the Money…
When you thinking about dipping into your Roth IRA, there are a few considerations you should make.
Will you have to tap any money that is not your principal? Remember that you’ll pay a 10% penalty on any amount you withdraw that is not part of the principal you deposited.
Will your retirement fund suffer? Remember that the Roth IRA is not like other IRAs. You can’t simply pay back the money and replenish your Roth at a later date. You’re still restricted by current tax laws that only allow you to deposit $5,000 per year. You have a finite amount of money that you can invest in a Roth IRA, and that amount dwindles when you pull some of it out for other expenses.
While having a Roth IRA can provide you with a financial cushion, it is still best to have a large emergency fund that can cover unexpected expenses before you have to consider dipping into your Roth IRA.