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I've been planning to save some money to buy a house in the next few years. I am 21 and working on building a solid credit score. Additionally, I've been investing some money with Lending Club (peer to peer lending). They have the option of IRA investment accounts. From what I understand, these accounts are tax free. Also, I hear that you are allowed to contribute up to $5,000 a year to an IRA, and you are able to pull out $10,000 for your first home. So my question is:

Should I create an IRA account and fill it up to $10,000 mark for my first home purchase? Should I use a traditional IRA or Roth IRA for this?

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I think you're missing several key issues here.

First for the facts:

  1. IRA contributions are $5500 a year maximum (currently, it changes with inflation), i.e.: you cannot deposit $10K in an IRA account in a single year.

  2. IRA withdrawals can only be made if you have something liquid in the IRA. You cannot withdraw from Lending Club IRA unless you manage to sell the notes currently held by you there.

  3. Roth IRA is funded with after-tax money, and you can withdraw your deposits in Roth IRA any time for any reason. No 10K limit there, only limited by what you deposited.

However the main thing you're missing is this:

You can withdraw up to $10K from your IRA for first home purchase without penalty. Pay attention: not without tax but without penalty. So what is the point in depositing $10k into IRA just to withdraw it the next year?

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    Ah thank you. not without tax is what I needed. I knew of 1 and 2. There is actually a market for buying and selling Lending Club notes. Thanks again for the input. – mosca1337 Nov 8 '13 at 3:44
  • @mosca1337 You also need income before you can contribute money to the IRA. Your access to a 401K is used to determine if you can deduct money deposited into a IRA. You also need to look at the type of investments with the IRA to see if they make sense from a risk perspective for saving money for a down payment. – mhoran_psprep Nov 8 '13 at 13:54

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