I have a 70 year-old mother who has $100K in an IRA account… She has rented for 26 years despite numerous attempts to get her to purchase a home… she retired in July of 2007 and now wants to buy a house with her tiny next egg. We have found her a place for 75K…. QUESTION: Can she and/or should she buy the house cash with the IRA and avoid any taxes… it appears from the comments that she would only save taxes on the initial $10,000.00… She is on a limited income and is drawing SS and from an annuity that runs out in 5 years… Her current rent is 750.00 a month. My concern about financing the house is that 1.) she will be paying interest on the 15 year note. 2.) in 5 years when she needs money she will not be able to borrow against the house because of her limited income.

Is there any advice that anyone can offer based on these circumstances?

We have discussed some of this with “Financial Planners” and they all recommend continuing to rent and let them try and grow the 100K in 5 years to $145K – 175K a major risk in my opinion and not one that addresses her rent situation which will be closer to 900.00 over the next 5 years.

Mathematically speaking I see most of the gains in the stock market (if it gains at all) being washed out by interest or increases she will incur in other areas of her life… like rent, cost of living increases, etc. Point being: owning a home seems to me to be the best investment under the circumstances… but how to minimize her tax burden is what I think we need help with.

And if the choice is between saving for a down payment in a Roth Vs saving for the down payment in a taxable account, the choice of a Roth is a no-brainer.

In the end, we came out way ahead on the house, so it worked out for us.

One way this _could_ work would be if you are getting a great price on the house and thus could take equity back out to put back into your IRA. However you would then be paying the mortgage interest on that. The interesting thing here is that interest could be tax deductible.

Personally, I think if you can meet your retirement saving goals with your 401k plan, it makes a lot of sense for prospective home buyers to take advantage of the ability to grow their down payment tax free.

I think nickel’s strategy was brilliant. I wouldn’t be surprised if there were still more in that IRA than there would have been if nickel had been conservative and kept more money out to use for a down payment.

Maybe waiting longer to buy a house would have been a good strategy, too, but it’s harder to tell about those things, especially if your monthly rental housing expenses are similar to your monthly buying housing expenses. Now every year is one step closer to the end of the mortgage.

Disclosure: I bought my house pretty much the second I possibly could. This turned out not to be a mistake for me because my income has not risen as fast as housing prices have. (My income has doubled, housing prices have tripled.) Normal people who don’t have trouble keeping up with first-year-teacher salaries should probably consider waiting.

In my opinion, one of the biggest mistakes a first-time homebuyer can make is to deplete his/her savings to afford a larger down payment. 5% is often all that’s required to capture excellent rates on your first mortgage. By holding back some funds, you safeguard yourself to some extent against losing the home if you suffer a major financial setback.

[*] – Or until the law changes