You can use money from an IRA to buy a house, and if you qualify as a first-time homebuyer under federal tax law, the IRS waives the usual 10% early withdrawal penalty on up to $10,000. That’s the headline rule. The details matter more than the headline, because the definition of “first-time” is looser than it sounds, Roth IRAs give you room well beyond $10,000, and income tax on a traditional IRA withdrawal can eat into the down payment you thought you had.
Who Qualifies as a First-Time Homebuyer
You don’t need to be buying your very first home. Under the tax code, you qualify if neither you nor your spouse has owned a principal residence during the two-year period ending on the date you acquire the new home.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Sold your last home three years ago and rented since? You qualify. Owned a vacation cabin but rented the place you actually lived in? You qualify.
The exception also lets you pull funds for a home purchase by your spouse, child, grandchild, or parent. The property has to be a principal residence, not an investment or a vacation home. “Date of acquisition” means the day you sign a binding purchase contract, or for new construction, the day building begins.
The $10,000 Lifetime Cap
The penalty-free amount is capped at $10,000 per person over your lifetime, not per purchase.2Internal Revenue Service. Topic No. 557, Additional Tax on Early Distributions From Traditional and Roth IRAs If you used $6,000 of it years ago, you have $4,000 left. Anything above the cap is hit with the standard 10% early withdrawal penalty.3Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
When both spouses have their own IRAs, each can use up to $10,000 toward the same property, so a couple can pull $20,000 penalty-free. Congress set the $10,000 figure in 1997 and has never indexed it for inflation.
Why a Roth IRA Often Gives You More Room
If you have a Roth IRA, look there first. Roth accounts follow ordering rules that make them far more useful for home purchases than the $10,000 exception alone suggests. Contributions come out first, and because you already paid tax on that money before it went in, contribution withdrawals are always tax-free and penalty-free at any age, for any reason. You don’t even need to claim the homebuyer exception.
Say you’ve contributed $30,000 to a Roth over the years and it’s grown to $42,000. You can pull out up to $30,000 without owing anything. The $10,000 homebuyer exception only comes into play if your withdrawal reaches into investment earnings on top of your contributions. Even then, the penalty is waived up to the cap. Whether the earnings piece is also free from income tax depends on the five-year holding rule, which starts on January 1 of the tax year you made your first Roth contribution.2Internal Revenue Service. Topic No. 557, Additional Tax on Early Distributions From Traditional and Roth IRAs If the account is younger than that, earnings are taxable as ordinary income even with the penalty waived.
Traditional IRA Withdrawals Still Get Taxed
The penalty waiver is not a tax waiver. Every dollar you take from a traditional IRA counts as ordinary income for that year. A $10,000 withdrawal for someone in the 22% federal bracket adds roughly $2,200 to the federal tax bill.4Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill State income tax may add more.
Bracket creep is the bigger risk. If your regular income already sits near the top of a bracket, the withdrawal can push part of your income into the next tier. Run the math before you request the money. What matters for your down payment is the net amount left after tax, and plenty of buyers realize that too late.
The 120-Day Spending Deadline
Once the money leaves your IRA, you have 120 days to apply it to qualified acquisition costs: purchase price, settlement fees, financing charges, and reasonable closing costs.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Furniture, post-closing renovations, and moving expenses don’t count.
If the purchase falls through, you have a way out. You can roll the funds back into an IRA within 120 days of receiving them, and the usual once-per-year rollover restriction doesn’t apply here. Miss that window, though, and the distribution stands with all its tax consequences.
Getting the Money and Reporting It
Start the paperwork well before closing. Your custodian will need your account number, the amount, and your withholding choices. Most process distribution requests within three to seven business days once the paperwork is validated. Wire transfers directly to escrow or the title company are standard and avoid the wait for a mailed check.
Withholding is worth thinking about. If you have 22% federal tax withheld from a $10,000 distribution, roughly $7,800 reaches escrow. If you need the full $10,000 at closing, skip the withholding and cover the tax when you file, setting money aside or adjusting estimated payments so April isn’t a shock.
In January or February of the following year, your custodian sends Form 1099-R. Most custodians report the distribution with code 1, “early distribution, no known exception,” even when they know it went toward a home.5Internal Revenue Service. Instructions for Forms 1099-R and 5498 That code doesn’t mean you owe the penalty. It means the custodian is leaving it to you to claim the exception.
You claim it by filing Form 5329 with your return and entering exception number 09 on line 2, which corresponds to a first-time home purchase up to $10,000.6IRS. Instructions for Form 5329 – Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts Skip the form and the IRS sees an unexplained early distribution and bills you for the 10% penalty. Keep the purchase contract, closing disclosure, and loan documents in case the IRS asks you to prove the money went to qualified costs.7Internal Revenue Service. IRS Audits: Records We Might Request
A 401(k) Loan May Cost Less
If you have a 401(k) through work, a plan loan is worth comparing before you touch an IRA. You can borrow up to the lesser of $50,000 or half your vested balance, and you repay yourself with interest. When the loan funds a primary residence, the repayment period can run longer than the standard five years for other plan loans.8Internal Revenue Service. Retirement Topics – Plan Loans
A 401(k) loan isn’t a taxable event. No income tax, no penalty, and the money goes back into your retirement account on schedule. The catch: if you leave the job, many plans demand full repayment within a short window, and an unpaid balance becomes a taxable distribution with the usual penalty. Not every employer plan even allows loans, so check with your plan administrator. For buyers who need more than $10,000 and have stable employment, a 401(k) loan often makes more financial sense than draining an IRA.
What You Lose By Withdrawing
The penalty waiver makes an IRA withdrawal feel free. The real cost is the compounding you give up. Money pulled from an IRA can’t be put back, aside from the one-time rollback window for a failed purchase. At a 7% average annual return, $10,000 withdrawn at age 30 would have grown to about $76,000 by age 60 and over $106,000 by age 65. The penalty waiver saves you $1,000. The lost growth is the real number.
That doesn’t mean the withdrawal is always wrong. If it helps you avoid private mortgage insurance, lock a lower rate, or buy before prices climb further, the housing equity may outrun what the IRA would have earned. Make that comparison explicitly. If you have other savings, tap the IRA last rather than first.
Buying Property Directly Through a Self-Directed IRA
A different version of this question comes up: can an IRA buy a house directly and hold it as an investment? Technically yes, through a self-directed IRA with a custodian that permits real estate. The rules are strict enough that a single misstep can destroy the account.
Neither you, your spouse, your children, your grandchildren, your parents, nor any other “disqualified person” can personally benefit from IRA-owned property.9Internal Revenue Service. Retirement Topics – Prohibited Transactions You can’t live in it, vacation in it, or let family use it. You can’t do repairs yourself or hire your own company to manage it. Rental income flows into the IRA; expenses come from the IRA.
Cross those lines and the IRS treats it as a prohibited transaction. The consequence for an IRA is severe: the entire account can be disqualified and treated as distributed to you on the first day of the year the violation happened.10Office of the Law Revision Counsel. 26 USC 4975 – Tax on Prohibited Transactions Income tax on the whole balance, plus the 10% penalty if you’re under 59½. A weekend in an IRA-owned condo can trigger a six-figure tax bill.