Planning your first home? Good news: the IRS lets first-time homebuyers withdraw up to $10,000 from a Roth IRA without the usual 10% early withdrawal penalty . This can be a powerful boost for a down payment or closing costs. Here’s how to make it work for you:
- First-time homebuyer exception. If you have not owned a main home in the past two years (for you and your spouse), you qualify as a “first-time homebuyer” . In that case, you can take up to $10,000 lifetime from your Roth IRA to buy, build, or rebuild a first home, penalty-free . (Each spouse can use up to $10K from their own Roth for a combined $20K .) The withdrawal must be used for qualified acquisition costs (purchase price, closing costs, etc.) within 120 days of receiving it . If the home purchase falls through, you can avoid tax/penalty by redepositing the funds within 120 days as a rollover .
- Who qualifies? You (or your spouse) count as a first-time buyer if neither of you owned a main home in the 2 years before the new purchase . Notably, you can use the withdrawal not only for your home but also for a first home for your spouse, child, grandchild, parent, or ancestor . In other words, as long as the buyer meets the 2-year rule, the funds are eligible.
Lifetime Limit on Withdrawal
The IRS caps the exception at $10,000 per person (not per account) over your lifetime . For example:
- If you and your spouse are first-time buyers, each can withdraw up to $10,000 from your own Roth IRAs (total $20,000) without penalty .
- The $10K limit includes all withdrawals under this exception. You cannot repeat it every few years – once you’ve used $10K, additional withdrawals are subject to the 10% penalty (unless another exception applies).
Always track how much of the $10K cap you’ve used. If you withdraw more (or the second spouse exceeds their $10K), the excess becomes a normal early distribution and would incur the 10% penalty (plus any income tax on earnings) .
The Roth IRA 5-Year Rule
A key detail is the 5-year holding rule for Roth IRAs. This determines taxes on any earnings you withdraw:
- Contributions vs. earnings. Contributions (the money you put in) can always be withdrawn tax- and penalty-free at any time . Earnings (investment gains) are treated differently.
- If your Roth IRA is less than 5 years old, the portion of your withdrawal that comes from earnings will be taxable (though the 10% penalty is waived under the first-time home exception) . In other words, you pay ordinary income tax on the earnings portion, but you do not pay the 10% penalty on up to $10K.
- If your Roth IRA is at least 5 years old, then the first-time home withdrawal becomes a qualified distribution, and earnings also come out tax-free . In this case, you owe neither tax nor penalty on earnings up to $10K.
Example: Suppose you’ve had a Roth IRA for 3 years and contributed $12,000. It has $2,000 of earnings (total $14,000). You withdraw $10,000 for your down payment. By IRA ordering rules, the first $12K of your withdrawals are your contributions, so that $10K withdrawal comes entirely from contributions – it’s 100% tax-free . There are no earnings yet involved, so no tax at all.
If instead you withdrew $14,000 (exhausting contributions and tapping $2K earnings), you’d owe income tax on the $2K earnings (since the account is <5 years), but you would not owe the 10% penalty on that $2K earnings because of the homebuyer exception . (Once the Roth is 5+ years old, even that $2K of earnings would be tax-free.)
Tax Implications
- No 10% penalty: Under the first-home exception, up to $10,000 of your withdrawal is exempt from the 10% early-distribution penalty .
- Income tax on earnings: Remember, Roth contributions have already been taxed, so they are withdrawn tax-free. Roth earnings are tax-free only if the 5-year rule is met. If not, those earnings are taxable income (but no extra penalty) .
- Reporting: You’ll receive a 1099-R for the distribution. When filing taxes, report the withdrawal normally and attach IRS Form 5329 to claim the homebuyer exception and waive the 10% penalty . (Financial firms may not automatically apply the exception.) Always consult a tax advisor about how to report the transaction.
Who Is a “First-Time Homebuyer”?
For this rule, the IRS defines you as a first-time homebuyer if you (and your spouse, if married) have had no present ownership in a main home during the 2-year period ending on the purchase date . In practice, that generally means neither of you owned a primary residence in the two years before the new home’s contract date. Key points:
- Two-year rule: If you or your spouse sold or left a home more than two years ago, you are now treated as a first-time buyer.
- Family members: You may use the Roth IRA withdrawal to help buy a home for a family member. Eligible homebuyers include yourself, your spouse, your child, grandchild, parent, or ancestor – as long as that person meets the first-time criteria . For example, you could withdraw $10,000 to help your child (who hasn’t owned a home) buy their first house.
Being a first-time buyer is easier than it sounds – even a gap of 24 months since your last home qualifies . Take advantage of this: it’s not only for your own first home, but also for helping close family buy theirs .
Steps, Timing & Documentation
- Plan ahead. Before pulling funds, confirm that your IRA meets the 5-year rule if you want the withdrawal fully tax-free. If not, be prepared to pay tax on any earnings portion.
- Contact your IRA custodian. Inform them you want a distribution for a first-time home purchase. They’ll provide withdrawal forms. You may specify the amount and that it’s under the homebuyer exception.
- Gather proof. Lenders often want documentation. Have your home purchase contract or builder agreement ready. You may need to show a lender or title company the distribution slip and that the funds are designated for your new home . A pre-approval or purchase agreement can serve as evidence of intent.
- Withdraw the funds. Request the withdrawal. Depending on your plan, you can have the check sent to you or directly to your bank. Keep good records of the deposit.
- Use the funds within 120 days. The IRS requires you to spend the money on the home by the 120th day after the distribution . Save receipts or closing docs for the purchase price and closing costs. If the home purchase is delayed or canceled, you have 120 days to redeposit the money into an IRA and avoid taxes/penalties .
- File taxes properly. Report the distribution on your tax return. Attach Form 5329 to waive the penalty under the homebuyer exception .
By following these steps, you meet IRS timing and record-keeping rules. This diligence also reassures mortgage lenders – it shows the IRA withdrawal is a legitimate, one-time source for your down payment, not a recurring loan. In fact, lenders often count accessible retirement funds as “reserves,” but requirements vary. Having clear documentation (withdrawal notice, bank statements, purchase agreement) will smooth your loan approval.
Limitations and Pitfalls
- Withdrawal limit. You cannot exceed $10K per person without losing the exception. Any amount over $10K (per IRA owner) becomes fully taxable and penalized if you’re under 59½ and no other exception applies .
- Age rules still apply for taxes. If you’re 59½ or older, you can withdraw any Roth funds without the 10% penalty regardless, but the 5-year rule still matters for Roth earnings. If your Roth is <5 years old, earnings are taxable on withdrawal even after 59½ (though penalty doesn’t apply) .
- Future retirement impact. Taking money out now means less growing for retirement. It’s a trade-off: do you need the funds more now or later? Consider “paying yourself back” by maxing future Roth contributions.
- Lender considerations. Some lenders may not count IRA distributions toward down payment unless you show you don’t have to repay them. Be prepared to explain that this is a withdrawal, not a loan, and show evidence of the closed IRA or deposit into your bank.
- Forms and errors. Ensure the custodian codes the withdrawal correctly. If box 7 on your 1099-R doesn’t say “exception,” you may need Form 5329. Mistakes can cost a 10% penalty, so check carefully.
Example: Alicia has a 4-year-old Roth IRA with $15,000 contributions and $5,000 earnings. She needs $10,000 for her first home. If she withdraws $10,000 now, the entire amount comes from her $15,000 contributions (per IRA ordering rules), so no tax or penalty at all. If she needed $18,000, that would tap $15,000 contributions and $3,000 earnings. She could still use $10K of that (the maximum) without penalty. The extra $3,000 earnings would be taxable (IRA <5 yrs) but not penalized (exception applied). If Alicia waits until her Roth hits 5 years old, then even withdrawing earnings becomes tax-free under the qualified distribution rules .
Take Action
Now that you know the rules, you can strategize confidently. Use your Roth IRA’s first-home exception to bridge your down payment gap. With up to $10,000 penalty-free (and tax-free if you meet the 5-year rule) at your disposal , you’re closer to turning the key in the door of your new home. Plan ahead, keep good records, and consult a tax advisor if needed – then move forward boldly toward your homebuying goal!
Sources: IRS guidance and retirement experts . (All information is current as of 2025.)