Can I Use My IRA to Buy a House Without Penalty?

You can use an IRA to buy a house without the 10% early withdrawal penalty, but only up to $10,000 over your lifetime, only if you meet the IRS definition of a first-time homebuyer, and only if the money is spent on qualified purchase costs within 120 days. The penalty waiver is not a tax waiver: money pulled from a Traditional IRA still counts as ordinary income for the year, so the real cost is usually higher than the headline suggests.

Who Counts as a First-Time Homebuyer

The label is misleading. You don’t have to be someone who has never owned property. Under 26 U.S.C. § 72(t)(8)(D), you qualify if neither you nor your spouse held an ownership interest in a principal residence during the two-year period ending on the date you acquire the new home.¹ Sold a house three years ago and rented since? You’re eligible. The clock resets each time you go without owning.

The “date of acquisition” is whichever comes first: the day you sign a binding purchase contract, or the day construction begins on a home being built for you.¹

The exception also stretches to certain family members. You can take a penalty-free IRA withdrawal to cover the home purchase costs of your spouse, your children or grandchildren, or your parents or grandparents (yours or your spouse’s).² The family member has to independently pass the two-year ownership test, and the property must be their principal residence. Vacation homes, rentals, and commercial buildings do not qualify.

The $10,000 Lifetime Cap and 120-Day Deadline

The penalty-free amount is capped at $10,000 per person over your entire lifetime. Not per year. Not per transaction. Every dollar you have ever pulled from any IRA under this exception counts against the same ceiling, and anything above it triggers the 10% penalty.²

Married couples can effectively double the amount. If both spouses have their own IRAs and both independently qualify, each has a separate $10,000 limit, for up to $20,000 toward the same house.

Once the money leaves the IRA, you have 120 days to spend it on qualified acquisition costs: the purchase price, settlement charges, closing costs, and reasonable financing expenses.² Miss the 120-day window and the exception is gone.

Traditional vs. Roth: What You’ll Actually Owe

The exception waives the 10% penalty. It does not waive income tax. What you owe depends on which type of IRA the money comes out of.

Traditional IRAs

Traditional IRA contributions went in pre-tax, so every dollar coming out counts as ordinary taxable income. For 2026, federal rates run from 10% to 37% depending on your total taxable income.³ A $10,000 withdrawal in the 22% bracket runs $2,200 in federal tax before any state tax is added.

The extra income can also push you into a higher bracket or shrink income-sensitive tax benefits. If you’re near the phase-out for the Child Tax Credit or the Earned Income Tax Credit, adding $10,000 to your adjusted gross income can cost more than the tax on the withdrawal alone.

Roth IRAs

Roth IRAs are funded with after-tax money, and the IRS pulls it out in a set order: original contributions first, then converted amounts, then earnings.⁴ Your original contributions come out tax-free and penalty-free any time, for any reason. The homebuyer exception only matters once you reach the earnings.

When earnings are in play, the five-year rule kicks in. The clock starts on January 1 of the tax year of your first-ever Roth contribution. If five tax years have passed, earnings withdrawn under the homebuyer exception come out both tax-free and penalty-free.⁴ If not, the earnings are penalty-free but still taxable as ordinary income.

The ordering rule matters in practice. Someone who contributed $30,000 to a Roth over the years and now has a $40,000 balance can withdraw the first $30,000 with no exception needed at all. Only the last $10,000 in earnings would require the homebuyer rule.

This Does Not Apply to 401(k) Plans

A common assumption trips people up here. The first-time homebuyer exception under § 72(t)(2)(F) applies only to IRAs, SEP IRAs, and SIMPLE IRAs.⁵ 401(k) and 403(b) plans are excluded. Some employer plans offer hardship withdrawals or participant loans for a home purchase, but those follow completely separate rules and are not what this exception covers.

Watch the Withholding When You Take the Money

When you request an IRA distribution, the custodian usually withholds 10% for federal income tax by default. Ask for $10,000 and $9,000 arrives in your account. To net the full $10,000 at closing, you either withdraw a larger amount (keeping in mind the exception only covers $10,000 of it) or elect out of withholding and handle the tax at filing time.

If you skip the withholding, make sure the tax gets paid somewhere else. The IRS expects tax to be paid as income is earned, and an uncovered distribution can trigger an underpayment penalty on top of the tax itself.⁶

If the Purchase Falls Through

Deals collapse. If you’ve already taken the distribution and the contract dies, you aren’t automatically stuck with the tax bill. Section 72(t)(8)(E) extends the usual 60-day IRA rollover window to 120 days for first-time homebuyer distributions.¹ Put the money back into an IRA inside that window and the distribution is treated as if it never happened. The rollback is also exempt from the one-rollover-per-year limit.

The catch is withholding. If your custodian held back 10%, you got less than you took out. To roll the full amount back, you need to cover the withheld portion from other funds. You’ll get that money back as a refund when you file, but the rollover has to be whole inside the 120 days.⁷

How to Claim the Exception on Your Tax Return

Your custodian will send you Form 1099-R. Box 7 will almost always show distribution code 1, meaning “early distribution, no known exception,” because the custodian doesn’t verify how you spent the money.⁸ Claiming the exception is your job.

You claim it on Form 5329. On Line 2, enter the amount qualifying for the exception (up to $10,000) and write exception number 09 in the space provided. Code 09 is “IRA distributions made for the purchase of a first home, up to $10,000.”⁹ That zeroes out the penalty on Line 4.

If you tapped Roth earnings, complete Part III of Form 8606 as well. Line 20 is where the qualified first-time homebuyer amount goes, and it feeds the Form 5329 calculation.¹⁰ Traditional IRA holders don’t need Form 8606 unless they’ve made nondeductible contributions.

Hold on to your settlement statement, the signed purchase contract, and receipts showing the money was spent within 120 days. If the IRS asks questions later, those documents are what save you.

1
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
2
Legal Information Institute. 26 USC 72(t)(8) – Qualified First-Time Homebuyer Distributions
3
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
4
Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs
5
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
6
Internal Revenue Service. Penalty for Underpayment of Estimated Tax
7
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
8
Internal Revenue Service. Instructions for Forms 1099-R and 5498 (2025)
9
Internal Revenue Service. Instructions for Form 5329 (2025)
10
Internal Revenue Service. 2025 Form 8606