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I’m 65 and a High Earner. I Don’t Plan on Retiring Soon – Is It a Bad Idea to Use My Roth IRA for Home Renovations?

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Should you cash out your retirement fund to upgrade your house? 

While there are some people for whom this will be a good idea, other households will be better off if they let their retirement fund keep growing. Ultimately, the decision will depend on your net worth, expected retirement expenses and tax strategy. Using Roth IRA withdrawals can be a good way to effectively fund tax-free renovations, but it can cost you a lot in the long run if you’re not otherwise prepared for your retirement.

Speak with a financial advisor about a thorough plan for your goals.

Examine Your Household Income, Assets and Finances

The answer to this question depends on your household finances, so look at your personal situation.

Start with your household’s income and assets. How much money do you have? How much do you and (if applicable) your spouse earn? Basically, if you take this money out of your retirement account, what will replace it? And how much flexibility to you have to adapt if things go wrong?

As a high-earner, it may be most effective to pay for renovations out of pocket, obviating the need to cash out sections of their retirement portfolio while your Roth IRA is left alone to grow. But if you do opt to withdrawal from your Roth IRA, make sure you have enough income once you do retire. 

If your retirement accounts can already meet your calculated in-retirement needs even after you spend this money on a home renovation, then it might be smart. If not, then withdrawing this money may leave you unable to deal with the unexpected and could cost you a lot in the long run. 

A financial advisor can help you weigh your options.

Estimate Your Returns Against Your Tax Advantages

The advantage to this is that you can take out this money tax-free. Your spending power for these renovations will be magnified by the fact that, compared with using your earned income, you can spend every dollar you withdraw from your Roth IRA without having to set aside any for taxes.

The problem, though, is twofold.

First, that tax-free income is supposed to be one of your key advantages in retirement. All of your other sources of income will be subject to income tax, from 401(k) and IRA plans to your Social Security. That Roth IRA, on the other hand, will generate an effectively much higher rate of income after you can no longer earn new wealth.

Second, every dollar that you withdraw is a dollar that won’t keep growing. 

By this point in your life, your retirement accounts should be at their peak growth. Every year that you leave this money invested it will continue to grow, earning more and more money for when you eventually do retire. For example, take that $50,000 from above. With an 8.5% rate of return, right in the middle of the range for Roth IRA growth, in three years that money would grow to $63,864.

By age 70, that $50,000 you withdrew would be worth $75,182. In other words, if you retire at age 70 and averaged an 8.5% return in your Roth IRA, it will be $15,182 more expensive to take this money from your IRA compared with paying out of pocket. 

Talk to a financial advisor about the right asset allocation for your retirement portfolio.

What Are Your Plans for Your Home?

It’s a significant mistake to assume that all the money you put into your house is an investment. First, even if the value of your home increases, there’s no guarantee that you get this money back on a dollar-for-dollar basis. And, if you do sell the house and make a profit, you will still need to spend money finding a new place to live.

This isn’t to say that treating your home as an asset is a bad idea. It’s just to say that treating this as parallel to financial securities is not wise.

Instead, think through your planning. If you’re looking to increase the value of your home for a near-term sale or reverse mortgage, and if you have reliable, professional advice that these renovations will add measurable value to the property, then this may be a good decision. Otherwise, it may be wise to treat this renovation as consumption spending with a speculative payoff down the road.

Need help reducing taxes to fund your goals? Talk to a financial advisor.

The Bottom Line

Taking money out of your Roth IRA to pay for home renovations might be a fairly bad idea. This will cost you a lot in sacrificed gains and, even if you don’t need that money today, you might need that tax-free income down the road.

Roth IRA Tips

  • Especially for younger investors, a Roth IRA can be an outstanding way to build retirement wealth.
  • A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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