First-Time Homebuyer IRA Exception: $10,000 Cap and 120-Day Rule

The first-time homebuyer IRA exception lets you withdraw up to $10,000 from an IRA before age 59½ without paying the 10% early withdrawal penalty, as long as the money goes toward buying a principal residence within 120 days. The cap is a lifetime figure per person, not per purchase or per year. Income tax may still apply depending on the account type, and workplace plans like 401(k)s aren’t covered.

Who Counts as a First-Time Buyer

The label is looser than it sounds. You qualify if neither you nor your spouse held an ownership interest in a principal residence during the two years ending on the date you acquire the new home. Someone who sold a house three years ago and has been renting since then qualifies just as much as a lifelong renter.¹

The acquisition date is either the day you sign a binding purchase contract or the day construction or reconstruction begins, whichever applies.¹

The home doesn’t have to be yours. You can use the exception for a principal residence being bought by your spouse, child, grandchild, parent, or grandparent. The person moving in must meet the two-year no-ownership test, but the money comes out of your IRA.¹

The $10,000 Lifetime Cap

Ten thousand dollars is the ceiling across every IRA you own, across your entire life. Once you’ve claimed the exception on that much, it’s gone. Any additional early withdrawal, even for another home purchase decades later, triggers the standard 10% penalty.¹

Because the limit is per person, a married couple with separate IRAs can each pull $10,000 for a combined $20,000 toward the same home. Both spouses have to individually qualify, and each distribution must come out of that spouse’s own account.

You’ll Probably Still Owe Income Tax

The exception only waives the penalty. Whether the distribution is also taxable depends on the account.

Traditional IRA

A traditional IRA distribution counts as ordinary income. Pull $10,000 and that full amount gets added to your taxable income for the year at your marginal rate. Most states with an income tax will also tax it.²

Roth IRA

Roth withdrawals come out in a set order: original contributions first, then any conversion amounts, then earnings. Your contributions were already taxed, so they come out tax-free and penalty-free at any age, for any reason. Many buyers never touch earnings at all, in which case the homebuyer exception isn’t even needed.

If your withdrawal reaches into earnings, the exception waives the 10% penalty on up to $10,000. Whether those earnings also come out income-tax-free depends on the five-year rule. If at least five tax years have passed since your first Roth contribution, earnings withdrawn for a first home (up to $10,000) are fully tax-free and penalty-free. Before that five-year mark, the penalty is still waived but income tax applies to the earnings portion.³

SEP and SIMPLE IRAs

The exception applies to SEP and SIMPLE IRAs too.² SIMPLE IRAs come with a wrinkle: withdrawals within two years of first participating in the plan normally carry a 25% penalty rather than 10%. The homebuyer exception overrides that higher penalty on the qualifying portion up to $10,000. Anything above that within the two-year window still gets hit with 25%.⁴

401(k) and 403(b) Money Doesn’t Qualify

This is where many buyers get caught. The first-time homebuyer exception applies only to IRAs. It does not apply to 401(k) plans, 403(b) plans, or other employer-sponsored retirement accounts.²

If your savings are in a 401(k), one option is rolling that money into a traditional IRA first. The rollover itself isn’t taxable, and once the funds sit in an IRA, they become eligible for the exception. The catch is timing. Your employer’s plan may not allow in-service withdrawals, and the money has to land in the IRA before you take the homebuyer distribution. This is a plan-ahead move, not a closing-week fix.

The 120-Day Rule

You have to use the withdrawn funds on qualified acquisition costs within 120 calendar days of receiving the distribution. Miss the window and the whole distribution loses its exception, so the 10% penalty comes back on top of the income tax.¹

Qualified acquisition costs include the cost of buying, constructing, or reconstructing a principal residence, plus reasonable settlement, financing, and closing costs. Routine remodeling after you’ve moved in doesn’t count. “Reconstructing” in the statute means substantially rebuilding a home, not cosmetic updates.¹

If the Deal Falls Through

The tax code builds in a safety valve. If the purchase is delayed or cancelled, you can put the money back into an IRA within 120 days of the original distribution. That’s an extension of the normal 60-day rollover window, granted specifically for failed homebuyer distributions. The one-rollover-per-year rule doesn’t apply to this recontribution, so it won’t block a separate rollover later in the year.¹

Knock-On Effects on Your Return

A traditional IRA distribution still lifts your adjusted gross income for the year, even with the penalty waived. That has follow-on consequences worth thinking about before you take the money.

The added income can push you into a higher marginal bracket, so other income gets taxed at a higher rate. If you claim the Earned Income Tax Credit, the extra income may shrink or eliminate it. If your modified AGI crosses $200,000 single or $250,000 married filing jointly, you could trigger the 3.8% Net Investment Income Tax on your investment earnings.⁵

Families with college-age kids should factor in financial aid. IRA distributions appear as income on the FAFSA even when the penalty is waived. The untaxed portion of any IRA distribution, reported as the difference between Form 1040 lines 4a and 4b, counts toward your Student Aid Index and can reduce aid eligibility. Retirement balances aren’t counted as FAFSA assets, but distributions become visible income the moment you take them.⁶

How to Claim the Exception

Your IRA custodian will send Form 1099-R reporting the distribution. Box 7 usually carries a generic early-distribution code rather than a homebuyer flag, so claiming the exception is on you.⁷

File Form 5329 (Additional Taxes on Qualified Plans) with your Form 1040 for the year of the distribution. On line 2, enter the amount qualifying for the exception and write exception number 09 in the space provided. Code 09 tells the IRS the distribution went to a first-time home purchase. Skip Form 5329 or use the wrong code and the IRS may assess the 10% penalty automatically and send a notice.³

Keep your Closing Disclosure to prove the acquisition date and costs, and keep records of any prior homebuyer distributions so you can show you’re still within the $10,000 lifetime limit. If the distribution went toward a family member’s home, hold onto documentation that they met the two-year no-ownership test.

1
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
2
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
3
Internal Revenue Service. Instructions for Form 5329
4
Internal Revenue Service. SIMPLE IRA Withdrawal and Transfer Rules
5
Internal Revenue Service. Topic No. 559, Net Investment Income Tax
6
Federal Student Aid. 2025-26 FAFSA
7
Internal Revenue Service. Instructions for Forms 1099-R and 5498