Save for a down payment with an IRA

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Dear Dr. Don,
I have six months’ worth of emergency living expenses in a savings account. I currently rent a home, as I don’t have enough money for a down payment, closing costs, etc. I don’t have credit card debt or other debt. What is the most important thing for me to start saving for now? Should I open an individual retirement account, or IRA, or should I start saving for a down payment on a home?
— Deanne Down Payment

Dear Deanne,
Start out by asking yourself what your goals are. Not necessarily financial goals but life goals. What do you want out of life, and how can building wealth help you accomplish these goals?

Not everyone needs to own a home. Take a look at Bankrate’s buy-versus-rent calculator, and see what that tells you about owning versus renting a home. You may be surprised by the result.

It sounds like you have your finances in order, and you just need a goal. One of the conveniences of a traditional IRA account is you can use money in the account for the down payment on a home without having to pay the 10 percent penalty tax on an early distribution. A Roth IRA has similar provisions, but contributions must be held for a five-year “seasoning” period to avoid the penalty tax on the investment earnings when distributed out of the account.

So an IRA account can be a good choice because you can use it to work toward either financial goal. Keep in mind that a Federal Housing Administration, or FHA, mortgage has a low down payment requirement of about 3.5 percent. Although an FHA mortgage has required mortgage insurance premiums, the lower down payment can get you into a home sooner. That could be important in today’s low-interest-rate environment and competitively priced housing market.

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