Can You Take Money Out of an IRA to Buy a House?

You can take money out of an IRA to buy a house, and if you qualify as a first-time homebuyer, up to $10,000 comes out without the 10% early withdrawal penalty even if you’re under 59½.¹ The penalty waiver isn’t a tax waiver, though. With a traditional IRA, every dollar still gets added to your income for the year. With a Roth, the picture looks very different. And the $10,000 is a lifetime cap, not a per-purchase allowance.

Who Counts as a First-Time Homebuyer

The label is looser than it sounds. You qualify as long as neither you nor your spouse has owned a principal residence during the two years before the purchase date.² Someone who sold a home three years ago and has been renting since fits the definition. So does someone who owns a vacation property that has never served as a primary residence in that window.

The exception also reaches beyond your own purchase. You can pull the money to help a spouse, child, grandchild, parent, or grandparent buy a home, provided the buyer meets the same two-year no-ownership test.² A parent can tap their own IRA to help an adult child with a down payment.

The $10,000 Lifetime Cap

The penalty-free amount tops out at $10,000 across your entire lifetime, not per home and not per account.² If you took $6,000 under this exception years ago, only $4,000 remains. Once the full amount is used, no future home purchase qualifies for the waiver from any IRA you own.

When both spouses have their own IRAs, each has a separate $10,000 limit, so a married couple could pull up to $20,000 toward the same home. Congress set the cap in 1997 and has never adjusted it for inflation, so in most markets it covers only a slice of what a buyer actually needs.

Traditional IRA vs. Roth IRA: Which One to Tap

Which account holds the money you’re planning to withdraw matters more than almost anything else about this decision.

Traditional IRA

The homebuyer exception waives the 10% penalty. It does not waive income tax. Every dollar you take out of a traditional IRA gets added to your gross income for the year.³ A $10,000 withdrawal can produce a $2,000 to $3,000 federal tax bill depending on your bracket, and some states will tax it too.

Your custodian will typically withhold 10% of the distribution for federal taxes unless you tell them otherwise.⁴ Request $10,000 with default withholding and only $9,000 actually reaches you. If you need the full amount at closing, either elect zero withholding and reserve cash for the tax bill, or account for the withholding in your planning (remembering that you can’t exceed the $10,000 penalty-free cap).

The extra income can also affect anything tied to your adjusted gross income. If your household sits near the phaseout range for the Earned Income Tax Credit or the premium tax credit for health insurance, a $10,000 bump could shrink or eliminate those benefits for the year.

Roth IRA

A Roth is almost always the better account to draw from. Because you funded it with after-tax dollars, your original contributions come out tax-free and penalty-free at any time, for any reason, with no homebuyer exception needed.⁵ For many people, contributions alone cover what they need for the home, and the withdrawal is genuinely painless.

The exception matters only if you dip into earnings. Whether those come out clean depends on the five-year rule: the Roth must have been open for at least five tax years, counted from January 1 of the year of your first contribution.⁶ If it has, up to $10,000 of earnings withdrawn for a first-time home purchase is tax-free and penalty-free. If it hasn’t, the penalty is still waived, but you’ll owe ordinary income tax on the earnings portion.⁷

What the Money Can Pay For, and the 120-Day Clock

The funds don’t have to go strictly toward the purchase price. The statute defines qualified acquisition costs to include buying, building, or rebuilding a home, plus any usual or reasonable settlement, financing, or closing costs.² Title fees, appraisal charges, and closing attorney costs all qualify. The home must be a principal residence, not an investment property or vacation house.

Once the distribution lands in your account, you have 120 days to apply it to those costs.² Miss the deadline and the distribution no longer qualifies for the exception. You’ll owe the 10% penalty on top of any income tax.

Time the withdrawal against your closing date carefully. Pull the money too early and a delayed closing can push you past 120 days. If the deal falls through entirely, your fallback is the general 60-day rollover rule, which lets you redeposit the funds into an IRA within 60 days of receiving them to avoid both the tax and the penalty. That 60-day window is shorter than the 120-day spending window, so a deal that collapses late in the process can leave you without a clean exit. Build in a buffer.

How to Request the Distribution and Report It

Contact your IRA custodian. Most handle distributions through an online portal; some still use paper forms. On the request, specify the amount and select the option that flags the withdrawal as a first-time homebuyer distribution. Pay attention to the withholding section, since the default 10% federal withholding is what shrinks your net proceeds. Processing usually takes at least several business days.

Your custodian will send you a Form 1099-R for the year of the distribution. The distribution code in Box 7 may or may not reflect the homebuyer exception. If it doesn’t, you claim the penalty exemption yourself by filing Form 5329 with your tax return, which flows to Schedule 2 of Form 1040.⁷⁸

Keep your purchase agreement, closing disclosure, and settlement statements. The IRS won’t ask for them with the return, but you’ll need them if the filing is later questioned. Hold the documentation for at least three years after the tax year of the withdrawal.

If Your Retirement Savings Are in a 401(k)

The first-time homebuyer exception applies only to IRAs. A withdrawal from a 401(k) before age 59½ to buy a home triggers both income tax and the full 10% early distribution penalty.¹

The workable alternatives are a 401(k) loan or a rollover. If your plan allows loans, you can borrow up to the lesser of $50,000 or half your vested balance.⁹ Most 401(k) loans must be repaid within five years, but loans used to buy a principal residence are exempt from that limit and can carry a longer term set by the plan.¹ Many plans allow up to 15 years. The real risk with a loan is job loss: most plans require full repayment within a short window after you leave, and any unpaid balance becomes a taxable distribution, potentially with the penalty. The other route is rolling 401(k) funds into a traditional IRA first and then taking the homebuyer distribution from the IRA, which requires enough lead time for the rollover to settle.

Is It Worth Doing?

The penalty waiver makes the withdrawal feel painless, but the real cost is what the money would have earned. At a 7% average annual return, $10,000 withdrawn at age 30 would have grown to roughly $76,000 by age 60. That’s a steep price for a fraction of a down payment.

The math can still work. If you’re close to hitting a down payment threshold that would let you avoid private mortgage insurance, or bridge a small gap to a better mortgage rate, the trade can pay off. Treating an IRA as a first-resort funding source for a home purchase is a different matter. Exhaust other savings, check whether the timing of the purchase is right, and recognize that you’re trading long-run retirement growth for a housing expense you might cover another way. The exception is a safety valve, not a plan.

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. Retirement Topics – Exceptions to Tax on Early Distributions
4
Internal Revenue Service. Pensions and Annuity Withholding
5
Internal Revenue Service. Publication 590-B – Distributions from Individual Retirement Arrangements
6
Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs
7
Internal Revenue Service. Topic No. 557, Additional Tax on Early Distributions from Traditional and Roth IRAs
8
Internal Revenue Service. Instructions for Form 5329 – Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts
9
Internal Revenue Service. Retirement Topics – Plan Loans