Dear Penny: Is It Smarter to Tap Savings or a Roth IRA for a First Home?

Dear Penny,

I’m looking at homes with my partner as we prepare to buy our first place.

We’re debating between two options: a more affordable home that would let us make a large down payment and keep monthly costs low, or a pricier home that fits more of what we want and gives us room to grow. Either way, we’d probably put down about the same amount of money.

My question is how to best fund the down payment. I have a Roth IRA and a decent amount in savings. Is there some ideal split?

I also have a 401(k), but I assume that should be off-limits for this.

-A.

Dear A.,

There’s no perfect formula here, even if I wish there were.

Personal finance is full of tidy rules of thumb: save 15% for retirement, put 20% down on a house, and so on. Those guidelines make it tempting to believe there’s a single set of numbers that guarantees financial safety.

But the truth is that one universal answer is nonsense. It is simply more appealing to invent a blanket rule than to admit that the right move depends on your circumstances.

That said, buying a home still makes sense for many people who can afford it, so I want to be clear that I support your plan to purchase one.

People often talk about renting as if it is wasted money. But rent also buys flexibility. It lets you move more easily when needed, and it keeps major repair bills off your shoulders.

My first question would be: how much cash do you need in reserve to feel secure if an emergency comes up? Whatever that number is now, you will probably want a larger cushion once you become a homeowner.

I’m not a fan of most financial rules of thumb, but one that does make sense is aiming for at least three months of living expenses in savings, especially in an uncertain economy.

That may not be realistic for everyone, but if you’re already established and making the leap into homeownership, it is a reasonable minimum target.

If you do not yet have that three-month emergency fund, I would keep building savings before buying.

If you do have it, leave that money alone and use only the amount above that threshold for the down payment.

For example, if your monthly living costs are $3,000 and you have $11,000 in savings, and you want a $7,000 down payment, I would take $2,000 from savings so your emergency fund stays intact, then use the remaining $5,000 from your Roth IRA.

You can withdraw Roth IRA contributions at any time without taxes or penalties. You can also withdraw up to $10,000 in earnings over your lifetime for a first-time home purchase, as long as the account has been open for at least five years. The IRS generally defines a first-time homebuyer as someone who has not owned a home in at least two years.

Since you and your partner sound fairly young, though, I suspect this may not even be necessary. At this point in life, a Roth IRA often contains mostly contributions anyway.

If you cannot assemble the down payment by combining savings and Roth contributions, that may be a sign you are aiming for too much house. Down payments are more manageable than people think, and many first-time buyers use FHA loans that require only 3.5% down.

And if you two are unusually good savers and can cover the down payment from savings while still keeping a healthy emergency fund, then use savings alone and leave the Roth IRA untouched.

You did not ask for house-picking advice, but I will offer a little anyway: homeownership is nearly always more expensive than people expect. So give extra weight to affordability, even if your first home is more practical than dreamy.