Yes, you can take up to $10,000 from an IRA toward a first home without the 10% early-withdrawal penalty, but “penalty-free” is not the same as “tax-free,” and the money you remove stops growing for retirement. Whether it is a smart move depends on your tax bracket, the type of IRA, and what else is available to you. Duane Buziak, a licensed mortgage broker (NMLS #1110647), walks clients through this decision regularly, and the answer is rarely a simple yes or no. The IRA first-time homebuyer exception rules are narrow but useful when applied to the right situation. Below, you will find how the exception works, who qualifies, how Traditional and Roth accounts differ, a worked example with real arithmetic, and a side-by-side look at the alternatives.
How the IRA First-Time Homebuyer Exception Works
Withdrawals from an IRA before age 59½ are called early distributions, and they normally carry an additional 10% tax on top of any regular income tax owed. The first-time homebuyer exception waives that additional 10% tax on up to $10,000 of distributions used for qualified acquisition costs. The IRS describes the additional tax and its exceptions on IRS Topic No. 557, and the detailed rules appear in IRS Publication 590-B. As of 2026, the $10,000 figure remains the published limit, but check the current publication before you act.
Two points trip people up. First, the exception only removes the 10% additional tax. Ordinary income tax can still apply to any pre-tax money you take from a Traditional IRA. Second, the $10,000 is a lifetime limit per person, not a limit per purchase. If you used part of it years ago, only the remainder is available now. Spouses each have their own $10,000, so a married couple with two IRAs can potentially access up to $20,000 combined.
What counts as qualified acquisition costs
Publication 590-B defines qualified acquisition costs as the costs of acquiring, constructing, or reconstructing a residence, plus the usual settlement, financing, and other closing costs. In practice, that means the down payment and closing costs on a purchase both qualify. Money spent on furniture, moving, or ongoing mortgage payments after closing does not.
The home must be a principal residence for the person using the funds. A second home or a rental property purchased as an investment does not fit the exception, which matters for investors who might otherwise be tempted to use it.
Who Counts as a First-Time Homebuyer in the IRS’s Eyes
The IRS definition is looser than most people assume. You are a first-time homebuyer if you had no present ownership interest in a principal residence during the two-year period ending on the date you acquire the new home. Someone who sold a house five years ago and has rented since can qualify. “First-time” here means “not an owner recently,” not “never owned.”
The same test applies to your spouse. If you have never owned a home but your spouse owned one within the past two years, the couple generally cannot use the exception for that purchase. This catches newly married buyers off guard, so ask the question early, before any money moves.
Helping a family member buy
The exception is not limited to your own purchase. Distributions can also help a qualifying family member buy a first home, and Publication 590-B lists the eligible relationships, including a child, grandchild, parent, or grandparent, along with certain spouse-related relatives. Confirm the exact list in the current publication, because the rules turn on the relationship to you or your spouse, and the person buying must themselves meet the first-time buyer test.
The 120-day rule
Funds must be used to pay qualified acquisition costs within 120 days of receiving the distribution. If the purchase falls through, for example because a contract collapses or a closing is delayed beyond the window, the IRS allows you to recontribute the money to an IRA within the allowed period, which can avoid the tax consequences. The mechanics have specific deadlines, so read the current wording in Publication 590-B and confirm with a tax professional before relying on it. The practical lesson is to line up the withdrawal with a firm closing date rather than pulling funds months ahead “just in case.”
Traditional IRA vs. Roth IRA: Different Tax Outcomes
The same $10,000 distribution produces very different results depending on the account type.
Traditional IRA
With a Traditional IRA holding deductible contributions, the exception waives the 10% penalty but the distribution is generally taxable income. A $10,000 withdrawal is added to your income for the year and can push part of your earnings into a higher bracket. If you made nondeductible contributions at some point, a portion may come out tax-free under the pro-rata rules, which is another reason to involve a CPA.
Roth IRA
Roth IRAs are more flexible. Your direct contributions can be withdrawn at any time, tax- and penalty-free, because you already paid tax on that money. Earnings are different. To be fully tax-free, earnings generally require that the Roth has been open for five tax years and that you have a qualifying event. A first-time homebuyer distribution, up to the $10,000 lifetime limit, is one of those qualifying events. The five-year clock has specific starting rules, particularly if conversions are involved, so verify the details in Publication 590-B.
Roth withdrawals follow an ordering rule: contributions come out first, then converted amounts, then earnings. Most buyers who need $10,000 from a Roth that has been funded for years can take it entirely from contributions and never touch the earnings question.
The mistake to avoid
The most common error is assuming “penalty-free” means “tax-free.” A buyer who withdraws $10,000 from a Traditional IRA expecting no cost can be surprised by a tax bill the following April. Treat the numbers here as general education, not tax advice, and have a CPA run your actual return before you take a distribution.
Worked Example: $10,000 From an IRA vs. Down Payment Assistance
Suppose you are buying a $350,000 home and have limited cash. Compare two paths. This is an illustration with assumed figures, not a quote or a promise of any result.
Path A: Turbo DPA with a minimal down payment. Turbo DPA (3.5%/5% options, 600 FICO minimum) pairs assistance with a first mortgage. At 3.5% down, your down payment is 0.035 x $350,000 = $12,250. Your retirement account is untouched.
Path B: Larger conventional down payment funded partly by an IRA. Say you aim for 10% down, which is 0.10 x $350,000 = $35,000. You already have $25,000 saved and pull $10,000 from a Traditional IRA to close the gap.
The IRA cost, under an assumed 22% federal bracket: 0.22 x $10,000 = $2,200 in federal income tax (no 10% penalty thanks to the exception, and ignoring any state tax). You receive about $7,800 after tax if taxes are withheld, so to net $10,000 for the purchase you would need to withdraw more than $10,000, and anything above the cap would face the penalty. That is why many buyers plan around the after-tax amount.
Then there is lost growth. As a hypothetical only, if $10,000 stayed invested and grew at 6% a year for 25 years, it would reach roughly $10,000 x 1.06^25, or about $42,900. Real returns vary and can be lower or negative. The point is that a $10,000 withdrawal today can cost a multiple of that amount at retirement.
What does the $10,000 move? It lifts your down payment from 7.1% to 10% in this scenario ($25,000 versus $35,000). Whether that is worth about $2,200 in tax plus the foregone growth depends on what the extra equity buys. Reaching a lower monthly payment or avoiding mortgage insurance on certain loan structures can be worth it. If the larger down payment only trims the payment modestly, preserving the retirement balance usually wins. A strategy conversation compares the monthly savings against the total cost, rather than looking at the down payment in isolation.
By Duane Buziak, NMLS #1110647. A NoTouch Credit Pull lets you pre-qualify and test scenarios like this one without a hard inquiry on your credit.
Down-Payment Strategies Compared by Program Fit
The IRA exception is one tool among several. This table compares strategies by who they fit and what they cost you, not by interest rate.
- IRA first-time homebuyer withdrawal: Best for buyers with a funded IRA and a clear closing date. Advantage: no 10% additional tax on up to $10,000. Trade-off: income tax on Traditional money and lost long-term growth.
- Dynamo DPA (2.5%/3.5% options, 580 FICO): Best for buyers with limited savings and moderate credit. Advantage: assistance reduces the cash you must bring. Trade-off: program terms and any repayment or resale conditions need review.
- Turbo DPA (3.5%/5% options, 600 FICO): Best for buyers who want a bit more assistance and have somewhat stronger credit. Advantage: preserves your savings. Trade-off: eligibility and structure vary, so confirm the details.
- FHA (3.5% down at 580+ FICO): Best for buyers with modest savings and credit still being rebuilt. Advantage: low minimum down payment. Trade-off: mortgage insurance premiums. Verify current minimums at HUD’s home buying resources.
- Gift funds: Best for buyers with family willing to help. Advantage: no tax cost to you in most cases. Trade-off: gift letter and documentation requirements.
- 401(k) loan: Best for buyers with a plan that permits loans and stable employment. Advantage: you repay yourself. Trade-off: repayment risk, and an unpaid balance after a job change can become a taxable distribution.
A 401(k) loan is a separate mechanism, not an exception to the early-withdrawal rules, and the repayment obligation is real. Large online names such as Rocket Mortgage and Movement Mortgage publish general first-time buyer education, which can be useful background reading. Fitting a strategy to your own numbers is a different exercise, and that is where Duane Buziak spends most of his client time.
Mistakes to Avoid and How to Time the Withdrawal
Most problems come from timing and paperwork rather than the rule itself.
- Timing against the 120-day window. Withdraw too early and the window can expire before closing. Withdraw too late and the funds may not clear in time for your wire. Build the schedule backward from the closing date.
- Treating $10,000 as a per-purchase allowance. It is a lifetime cap. Withdrawing beyond it triggers the 10% additional tax on the excess, and you cannot reuse the exception for a later purchase.
- Weak documentation. A broker and underwriter will want to source and season large deposits. Keep the IRA statement showing the withdrawal, the transfer into your account, and later the Form 1099-R the custodian issues.
- Wrong tax reporting. The exception is generally claimed on Form 5329 with the proper exception code. Check the current Form 5329 instructions and work with a tax professional, because custodians sometimes code the distribution incorrectly.
A practical order of operations:
- Confirm you and your spouse meet the two-year test.
- Check how much of your lifetime $10,000 remains.
- Compare the after-tax cost against DPA, gift funds, and FHA options.
- Get pre-qualified with a NoTouch Credit Pull so you know your real cash-to-close before touching retirement money.
- Time the distribution to the closing date and keep every statement.
Mapping Your Down Payment Before You Touch Retirement Savings
The exception removes the 10% additional tax on up to $10,000, but it does not erase income tax on Traditional IRA money, and it cannot give back the growth you forgo. For some buyers, that trade is worth it. For others, assistance programs or gift funds reach the same closing table at a lower lifetime cost.
Stop overpaying on your mortgage and see how a thoughtful strategy could save you thousands over the life of your loan. Talk to Duane today at Mortgage Shopping (Supra Mortgages / Duane Buziak Mortgage Maestro) for a no-obligation conversation, with a NoTouch Credit Pull pre-qualification that leaves your credit untouched, and map out your down payment before you decide what to withdraw. The right mortgage is the one that fits your plans, not just the one with the lowest number on a rate sheet.