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I've seen too many people get excited about using their IRA for a home purchase without understanding what they're really giving up. The National Association of REALTORS®' 2024 annual report shows the average first-time buyer put down 9% in 2024. When home prices remain elevated across most markets, that's still a substantial chunk of money.
Here's what nobody tells you upfront: using your IRA might solve today's problem while creating a much bigger one down the road. Think of it like borrowing from your future self, and your future self doesn't get a say in the matter. In my MSW program, we learned about systems thinking and how decisions ripple through interconnected parts of our lives.
Okay, so here's what happened with these two account types, and why it matters more than most people realize.
Traditional IRAs and Roth IRAs work in completely opposite ways when it comes to taxes. According to IRS Publication 590-A, traditional IRAs give you a tax deduction now and tax your withdrawals later, while Roth IRAs tax your contributions upfront but let you withdraw tax-free in retirement.
When you contribute $6,000 to a traditional IRA, you might reduce your taxable income by that same amount. The textbook answer is that you're deferring taxes until retirement, but really what's happening is you're making a bet that you'll either be in a lower tax bracket later or that tax laws will work in your favor.
With a Roth IRA, you pay taxes on that $6,000 now. But here's the trade-off: when you're 65 and pulling out $50,000, you don't owe the IRS a penny. The Tax Policy Center's analysis of retirement accounts shows that for many middle-income earners, Roth accounts provide better long-term value despite the immediate tax hit.
One thing that surprises people: with a Roth IRA, you can withdraw your contributions at any time, for any reason, with no taxes or penalties. Let's say you put in $30,000 over five years, and it grew to $38,000. You can take out that original $30,000 whenever you want. The $8,000 in earnings? That's where the rules get stricter.
Traditional IRAs don't give you this flexibility at all. Every dollar you withdraw counts as taxable income, and if you're under 59½ without an exemption, you're looking at that 10% early withdrawal penalty on top of regular income taxes.
The IRS has a very specific definition, and it might work in your favor even if you've owned before. According to IRS Publication 590-B, you're considered a first-time home buyer if you (and your spouse, if married) haven't had an ownership interest in a principal residence during the 2-year period ending on the date you acquire your new home.
Notice that word "principal residence." If you owned an investment property but never lived in it as your primary home, you might still qualify. Same thing if you sold your home three years ago—you're back in first-time buyer territory for IRS purposes.
You can withdraw up to $10,000 penalty-free for a home purchase. Your spouse can do the same, giving married couples a combined $20,000. But this limit was set in 1997 and hasn't been adjusted for inflation.
Let me show you the math. According to the Bureau of Labor Statistics CPI Inflation Calculator, $10,000 in 1997 equals approximately $19,200 in 2025 dollars. So the real purchasing power of this exemption has been cut nearly in half over 28 years.
This is where people get caught. You have exactly 120 days from the date you receive your IRA distribution to use those funds for qualified home purchase expenses. Miss that deadline by even one day, and the entire withdrawal becomes a regular early distribution subject to the 10% penalty plus income taxes.
What counts as the "date of acquisition"? For buying an existing home, it's the day you sign the purchase contract, not closing day. For new construction, it's the day construction begins. The IRS guidance on retirement distributions is very clear on this timing.
Here's a real scenario: you withdraw $10,000 on March 1st, thinking you'll close on your home by May 1st. But then the inspection reveals issues, repairs take longer than expected, and closing doesn't happen until July 15th—that's 136 days. You've now blown past the 120-day window. Your options? Either contribute the money back within the deadline, or accept that you'll pay the 10% penalty ($1,000) plus income taxes on the full amount.
Most people think this exemption only covers the down payment, but qualified home purchase costs actually include the purchase price or construction costs, standard settlement and closing costs, financing charges and fees, points paid on the mortgage, title insurance and escrow fees, and appraisal costs and inspection fees.
What you cannot use these funds for: furniture, appliances, moving costs, or renovations after closing. Those expenses might feel connected to buying your home, but the IRS draws a hard line.
Even if you qualify as a first-time home buyer, Roth IRAs have an additional requirement: the account must be at least five years old to avoid penalties on the earnings portion of your withdrawal. This is where I see younger home buyers get tripped up.
Let's walk through an example with real numbers. Sarah opened her Roth IRA on January 15, 2022, and wants to buy her first home in March 2025. She's contributed $18,000 total, and the account has grown to $22,000.
Here's what happens:
Wait, let me clarify that—the penalty only applies to the earnings, not the contributions. But that $400 still stings when you weren't expecting it.
This rule surprises people in a good way. You can use your $10,000 IRA withdrawal to help with home purchases for your spouse, your child or your spouse's child, your grandchild or your spouse's grandchild, and your parent or ancestor (or your spouse's).
They must also meet the first-time home buyer requirements. So if your daughter is buying her first home and you want to help with the down payment, you can tap your IRA penalty-free for up to $10,000 of her costs.
Just because you avoid the 10% early withdrawal penalty doesn't mean the withdrawal is tax-free (unless you're using Roth IRA contributions). Traditional IRA withdrawals still count as ordinary income, which can push you into a higher tax bracket.
Here's a worked calculation to show you the impact:
Scenario: Single filer with $65,000 salary, withdrawing $10,000 from traditional IRA
So your $10,000 withdrawal only delivers $7,800 in actual purchasing power. In states with income tax, you'll lose even more to state taxes.
When we acquired this process from another system, one pattern became obvious: people consistently underestimated the opportunity cost of early retirement withdrawals. In my MSW program, we talk about "future orientation" and how hard it is for humans to value future benefits over immediate needs.
Let's work through the actual numbers. According to Vanguard's 2024 analysis of retirement account returns, the average annual return for a balanced portfolio over the past 30 years has been approximately 7.8% after inflation.
Starting point: $10,000 withdrawn at age 30
Investment period: 37 years until age 67
Average annual return: 7.8%
Future value calculation: $10,000 × (1.078)^37 = $172,847
You read that correctly. That $10,000 you withdraw today would have grown to over $172,000 by retirement age. Even accounting for the fact that you might contribute that money back later, you lose years of compound growth that you can never fully recapture.
The younger you are, the more damaging an early IRA withdrawal becomes. Here's what that same $10,000 withdrawal costs at different ages:
Age at Withdrawal
Years Until 67
Lost Retirement Value
Age 25
42 years
$233,948
Age 30
37 years
$172,847
Age 35
32 years
$127,628
Age 40
27 years
$94,258
Age 50
17 years
$50,733
Data from the Federal Reserve's 2024 Survey of Consumer Finances shows that the median retirement account balance for people under 35 is only $18,880. Withdrawing $10,000 means depleting more than half your retirement savings.
Before you tap your IRA, let's explore options that won't mortgage your retirement to buy your home. I completely understand the frustration of being so close to homeownership but not quite having enough for the down payment.
If your employer offers 401(k) loans, this might be your best alternative. According to IRS regulations on retirement plan loans, you can borrow the lesser of $50,000 or 50% of your vested account balance. If 50% of your balance is less than $10,000, you can still borrow up to $10,000.
Here's why this works better than an IRA withdrawal: you're paying the money back to yourself with interest, typically over 5 years. The interest you pay goes back into your own 401(k) account.
Real-world example: James has a 401(k) balance of $45,000 and borrows $20,000 for his down payment at 5% interest over 5 years. His monthly payment is $377. Over five years, he pays back the $20,000 plus $2,620 in interest—but that interest goes back into his retirement account.
State and local programs provided over $470 million in down payment assistance in 2024, according to the National Council of State Housing Agencies. Yet research shows only 13% of eligible first-time buyers actually use these programs.
Grants: Typical range of $2,500 to $15,000 that never needs to be repaid. Usually requires you to stay in the home for 5-10 years.
Forgivable Loans: You receive funds at closing, and the loan is forgiven at 20% per year over five years. Stay in your home for five years, and you never repay a penny.
Deferred Payment Loans: No monthly payments required. The loan is repaid when you sell, refinance, or pay off your first mortgage.
Low-Interest Repayable Loans: Monthly payments required, but at interest rates often 2-3% below market rates.
In Louisville, where I'm based, the Kentucky Housing Corporation offers up to $6,000 in down payment assistance through the Kentucky Affordable Housing Loan Program. Most states have similar programs—search "[your state] housing finance agency" to find local options.
According to Fannie Mae's gift fund guidelines, you can receive gift funds for your down payment from family members, your domestic partner, or a fiancé or fiancée.
For conventional loans, some of your down payment typically needs to come from your own funds, but gift funds can cover the rest. FHA loans are even more flexible—gift funds can cover your entire down payment and closing costs.
Here's what makes this better than an IRA withdrawal: there's no tax consequence for gifts under $18,000 per person per year (the 2025 IRS gift tax exclusion, accessed October 2025). Your parents could each gift you $18,000, and if you're married, they can gift the same to your spouse. That's potentially $72,000 with zero tax implications.
The numbers speak for themselves. An IRA withdrawal gives you the least immediate cash and costs you the most long-term.
At AmeriSave, we work with first-time home buyers every day who are navigating exactly these decisions. Our Home Loan Experts can walk you through all your options—not just whether to use retirement funds, but also which loan programs offer the lowest down payment requirements and what your actual monthly payment would look like with different down payment amounts.
If you've weighed all the alternatives and decided that an IRA withdrawal still makes the most sense for your situation, here's the step-by-step process.
Your administrator might be a major firm like Vanguard, Fidelity, or Charles Schwab. You'll need to call their customer service line or log into your online account, request a hardship distribution for first-time home purchase, and ask about their specific forms and processing timeline.
Most administrators process distributions within 5-10 business days, but some can take up to three weeks during busy periods. That's something you need to plan for.
Every administrator has slightly different paperwork, but you'll typically need to provide your identification and account information, the distribution amount you're requesting, the reason code (first-time home purchase), how you want to receive the funds, and whether you want taxes withheld.
Here's something nobody tells you: you can request that your administrator withhold federal and state taxes from the distribution. If you know you'll owe $2,200 in taxes on a $10,000 withdrawal, you could request a $12,200 distribution with $2,200 withheld for taxes, netting you the full $10,000 you need.
Your lender will need to verify where your down payment funds came from. According to CFPB guidelines on mortgage documentation, you'll need to provide a letter from your IRA administrator showing the withdrawal, bank statements showing the funds deposited into your account, and a paper trail connecting the IRA withdrawal to your down payment.
From the day your check is dated or the electronic transfer hits your bank account, you have 120 calendar days to use those funds for qualified home purchase expenses. Track this deadline carefully.
If your home purchase falls through for any reason, you can avoid the penalty by recontributing the money to your IRA within those 120 days.
Even if your withdrawal is penalty-free, you still need to report it. Your IRA administrator will send you Form 1099-R in January showing your distribution. When you file your taxes, report the distribution amount on Form 1040, and if you took more than the $10,000 exemption, complete Form 5329 to calculate the penalty.
Working with a tax professional for the year you take an IRA distribution is probably worth the cost.
This strategy works best when you're within $10,000 of having enough for a down payment and have exhausted all other options, you're closer to age 59½, you have other substantial retirement savings, and you have a clear plan to rebuild your balance.
But seriously consider alternatives if the $10,000 represents more than 30% of your total retirement savings, you're under 35, you haven't explored down payment assistance programs, or your employer offers 401(k) loans. That $172,000 in lost retirement savings seems abstract when you're 30 and trying to buy your first home, but it's very real money you'll need later.
Using your IRA for a home purchase is a big decision with long-term consequences. Whether you decide to tap your retirement savings or explore alternatives like 401(k) loans, down payment assistance, or gift funds, you deserve expert guidance that puts your financial future first.
At AmeriSave, we've helped thousands of first-time buyers navigate these exact choices. Our Home Loan Experts can show you all your options, calculate your real costs, and help you find the loan program that works best for your situation. We'll walk you through down payment requirements, monthly payment estimates, and whether using retirement funds makes sense for you specifically.
No, the first-time home buyer exception only applies to a principal residence. The IRS is very specific about this in Publication 590-B. If you're buying a vacation home, rental property, or second home that won't be your main residence, the $10,000 penalty-free withdrawal isn't available. You'd face the full 10% early withdrawal penalty plus income taxes on any withdrawal before age 59½. The property must be the home where you intend to establish your primary residence, and your lender will verify this through occupancy requirements on your mortgage application.
You have a safety net if your purchase doesn't close. According to IRS regulations, you can avoid the early withdrawal penalty by recontributing the funds to your IRA within 120 days of receiving the distribution. Let's say you withdraw $10,000 on March 1st for a home closing scheduled for April 15th, but the deal falls apart due to inspection issues. As long as you return that $10,000 to your IRA by June 29th (120 days later), you can avoid both the 10% penalty and the income taxes. The catch is that you need to have the funds available to recontribute. Some IRA administrators make this process easier than others, so contact yours immediately if your purchase falls through.
The limit is $10,000 per person over your lifetime, not per home purchase or per year. If you're married, both you and your spouse can each withdraw up to $10,000 from your respective IRAs, giving you a combined $20,000. However, both spouses must independently meet the first-time home buyer requirements. This lifetime cap is important because once you've used your $10,000 exemption, you can never use it again. For example, if you withdraw $7,000 for a home purchase in 2025, you only have $3,000 remaining of your lifetime exemption. This $10,000 limit also hasn't been adjusted for inflation since 1997.
The IRS rules are different for 401(k) plans versus IRAs. With a 401(k), there's no specific first-time home buyer exemption like there is for IRAs. However, many 401(k) plans allow you to borrow money from your account rather than withdrawing it permanently. You can typically borrow up to the lesser of $50,000 or 50% of your vested account balance. The major advantage is that you're paying the money back to yourself with interest over five years. The interest you pay goes back into your own 401(k) account, not to a bank. Not all 401(k) plans offer loans, so check your specific plan documents or contact your HR department.
You have a $10,000 lifetime limit for penalty-free withdrawals as a first-time home buyer, and you can use it in any combination you choose. For example, you could withdraw $6,000 for your first home purchase, and then still have $4,000 available if you become a first-time buyer again later. However, each withdrawal must be used within 120 days for qualified home purchase expenses. You can't withdraw $2,000 now, let it sit in your bank account for six months, and then use it later. The 120-day clock starts ticking the moment you receive the funds. Most people find it makes more sense to withdraw the full amount they need all at once, close to their anticipated closing date.
Using IRA funds for your down payment can actually help your mortgage qualification because it reduces the amount you need to borrow, which lowers your debt-to-income ratio. However, your mortgage lender will need to source and season your funds, meaning they need to verify where your down payment came from. You'll need to provide a letter from your IRA administrator showing the distribution, bank statements showing the funds deposited into your account, and documentation connecting those funds to your down payment. If possible, complete your IRA withdrawal at least 60 days before you plan to apply for your mortgage, which gives the funds time to season in your account and simplifies the documentation process.
This distinction confuses people all the time. Penalty-free means you avoid the 10% early withdrawal penalty that normally applies to IRA distributions before age 59½. Tax-free means you don't owe income taxes on the withdrawal. The first-time home buyer exception makes your withdrawal penalty-free, but not necessarily tax-free. If you have a traditional IRA, your withdrawal will still count as taxable income even though you avoided the 10% penalty. If you withdraw $10,000 from a traditional IRA and you're in the 22% tax bracket, you'll owe approximately $2,200 in federal income taxes plus any state income taxes, but you won't owe the additional $1,000 early withdrawal penalty. So you net $7,800 after taxes.
No, once you reach age 59½, you can withdraw from your IRA for any reason without the 10% early withdrawal penalty, so the first-time home buyer exception becomes irrelevant. At 59½ or older, you're considered retirement age by the IRS. However, the tax treatment still depends on what type of IRA you have. Traditional IRA withdrawals will always count as taxable income regardless of your age, because you received a tax deduction when you contributed those funds. Roth IRA withdrawals after 59½ are completely tax-free and penalty-free as long as you've met the 5-year rule. For people over 59½, the decision becomes simpler because it's really just about whether you want to use retirement savings for a home.
You need to keep comprehensive records because the IRS could request documentation for up to seven years. At minimum, save copies of the letter from your IRA administrator showing the distribution amount and date, your bank statements showing the deposit and use of those funds, your closing disclosure showing your home purchase costs, and receipts for any qualified expenses you paid from the IRA withdrawal. Your IRA administrator will send you Form 1099-R reporting the distribution. You'll need to report this on your Form 1040, and if you took more than the $10,000 exemption, you'll also need to complete Form 5329 to calculate the penalty on the excess. Keep copies of these tax forms with your other tax records.
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