IRA First-Time Homebuyer Withdrawal: Limits, Rules, and Taxes

If you’re under 59½, the IRS lets you take up to $10,000 out of an IRA for a first-time homebuyer withdrawal without paying the usual 10% early distribution penalty.¹ The $10,000 is a lifetime cap per person, the money has to go toward qualified acquisition costs within 120 days, and — importantly — the exception only waives the penalty. If you pull from a traditional IRA, you still owe regular income tax on the distribution.

Who Counts as a First-Time Homebuyer

The definition is looser than the label suggests. You qualify if neither you nor your spouse had an ownership interest in a principal residence during the two-year period ending on the date you acquire the new home.² Someone who owned a home a decade ago but has rented for the last two years qualifies. The test looks only at your principal residence, so owning a rental property or a vacation cabin you never lived in doesn’t disqualify you.

The exception also stretches beyond you personally. You can use the withdrawal to help fund a home purchase for your spouse, child, grandchild, or parent (or your spouse’s child, grandchild, or parent).³ The family member has to meet the first-time homebuyer definition on their own.

The $10,000 Lifetime Cap

The penalty-free amount is capped at $10,000 per person across your entire lifetime, not per home and not per transaction.² If you took a $6,000 penalty-free housing withdrawal years ago, only $4,000 of capacity remains. Once you’ve used the full $10,000, any later early withdrawal for a home triggers the standard penalty.

A married couple can each use their own $10,000 from their own IRAs, so together you can pull up to $20,000 penalty-free for a shared purchase. The cap tracks each spouse independently. The $10,000 figure has not been adjusted for inflation since the provision was enacted in 1997.

The 120-Day Spending Window

You have to use the withdrawn funds to pay qualified acquisition costs before the close of the 120th day after you receive the distribution.² The clock starts the day your IRA custodian issues the check or transfer, not the day you asked for it. Miss the window by a day and the entire distribution becomes a standard early withdrawal subject to the 10% penalty.

If the deal falls through — a failed inspection, a financing problem, a seller who backs out — you can avoid the penalty by returning the money to your IRA within that same 120-day period.³ This is why timing matters. Taking the distribution months before closing creates real risk: if the purchase collapses on day 115, you have almost no room to put the money back.

What the Money Can Pay For

Qualified acquisition costs include the cost of buying, building, or rebuilding a home, plus any usual or reasonable settlement, financing, or other closing costs.² The purchase price is the obvious one, but title insurance premiums, appraisal fees, recording fees, and lender origination fees all fit within usual or reasonable closing costs. If you’re building, labor and materials count too. The home has to be your principal residence, not a rental or a second home.³

Keep your closing disclosure and any construction contracts. If the IRS later questions the withdrawal, those documents show where the money went. Any portion of the distribution that exceeds your documented acquisition costs won’t qualify for the exception and will get hit with the 10% penalty.

Traditional vs. Roth: The Tax Bill Is Different

The penalty exception works the same for both account types, but what you owe in income tax depends heavily on which IRA you tap.

Traditional IRA

A traditional IRA distribution is included in your gross income for the year, so you owe regular income tax on the full amount.⁴ The homebuyer exception removes the 10% penalty only. A $10,000 traditional IRA withdrawal could add roughly $1,200 to $2,200 to your federal tax bill depending on your bracket, and it raises your adjusted gross income, which can shrink income-dependent credits and deductions.

Roth IRA

Roth IRAs are friendlier because of the ordering rules. Money comes out in a fixed sequence: your regular contributions first, then conversion amounts, then earnings.⁵ You already paid tax on your contributions, so withdrawing them is tax-free and penalty-free at any age, for any reason. No exception needed.

The homebuyer exception only comes into play with a Roth once you’ve exhausted contributions and are pulling earnings. Then the $10,000 exception waives the 10% penalty on those earnings. Whether you also owe income tax on the earnings turns on the five-year rule: if at least five tax years have passed since your first Roth contribution and the money goes to a qualifying home purchase, the earnings come out entirely tax-free.³ If the five years aren’t there yet, the penalty is still waived, but income tax applies to the earnings portion.

Which Accounts Qualify (and Which Don’t)

The first-time homebuyer exception applies to traditional IRAs, Roth IRAs, SEP IRAs, SIMPLE IRAs, and SARSEP plans.¹ It does not apply to 401(k) plans, 403(b) plans, or other employer-sponsored qualified retirement plans. This catches a lot of people off guard.

Some 401(k) plans allow hardship withdrawals for a primary home purchase, but that’s a different mechanism. A hardship distribution from a 401(k) is still subject to the 10% early withdrawal penalty on top of income tax, and it depends on your plan’s rules.⁶ If your savings sit in a 401(k) and you want the IRA-specific exception, rolling funds into a traditional IRA first is one option, but the added complexity and timing risk deserve a conversation with a tax professional well before closing day.

Reporting the Withdrawal on Your Tax Return

Your IRA custodian will send a Form 1099-R after year-end showing the distribution. Box 7 will often show distribution code “1,” meaning early distribution with no known exception. That’s not a problem by itself. The custodian usually doesn’t know why you took the money, so claiming the exception is on you.¹

You claim it on IRS Form 5329. In Part I, enter the total early distribution and then enter exception code “09,” the designated code for first-time homebuyer distributions up to $10,000.⁷ The result flows to Schedule 2 of your Form 1040. If you and your spouse each took a qualifying distribution, each of you files a separate Form 5329.

Make sure the amount on Form 5329 matches your 1099-R. A mismatch between those two numbers is one of the fastest ways to draw an automated IRS notice. For a traditional IRA, you’ll also report the withdrawal as taxable income on your 1040. The penalty is waived; the income tax is not. Hold onto your purchase contract, closing disclosure, and 1099-R together for at least three years in case the IRS asks.

Mistakes That Cost Money

The biggest one is assuming penalty-free means tax-free. For a traditional IRA, it doesn’t. Budget for the income tax when you decide how much to pull, or you’ll be short in April.

Poor timing is the next expensive error. Taking the distribution months before closing creates unnecessary risk. If the deal collapses and you can’t return the money inside 120 days, you owe both the income tax and the penalty. Wait until your closing date is reasonably firm before you request the distribution.

Withdrawing more than your actual qualified costs is another trap. Pull $10,000 when your real acquisition costs come to $7,500 and the extra $2,500 doesn’t qualify — it gets the 10% penalty. Use your lender’s loan estimate to preview closing costs and take out only what you need.

And remember the account boundary. This exception is IRA-only. Calling your 401(k) provider weeks before closing expecting to use it leaves you scrambling for alternatives at exactly the wrong moment.

1
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
2
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
3
Internal Revenue Service. Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)
4
Internal Revenue Service. Topic No. 557, Additional Tax on Early Distributions From Traditional and Roth IRAs
5
eCFR. 26 CFR 1.408A-6 – Distributions
6
Internal Revenue Service. Hardships, Early Withdrawals and Loans
7
Internal Revenue Service. 2025 Instructions for Form 5329