Yes, you can use IRA money for a down payment, but the rules depend on which type of IRA you have and whether you've withdrawn from it before

The IRS allows you to take money out of a traditional or Roth IRA without the usual 10% early withdrawal penalty if you're buying your first home — but only up to $10,000 in your lifetime, and only if you meet the definition of "first-time homebuyer." You'll still owe income tax on the withdrawal from a traditional IRA. A Roth IRA works differently: you can withdraw contributions (the money you put in) anytime tax-free, but earnings (the growth) face the penalty and tax unless you meet an exception. If you've already used the $10,000 first-time homebuyer exemption in the past, you cannot use it again.

The money moves directly from your IRA custodian to you, usually within three to five business days. You then use it like any other cash for your down payment. There's no separate application or approval process with the IRS — your IRA custodian handles the withdrawal, and you report it on your tax return when you file.

Key Takeaways

  • Traditional and Roth IRAs allow a one-time $10,000 withdrawal penalty-free for a first-time home purchase, though you'll owe income tax on traditional IRA withdrawals.
  • The $10,000 limit is a lifetime cap per person, not per year, so if you've used it before you cannot use it again.
  • Roth IRA contributions can be withdrawn anytime without penalty or tax, but Roth earnings are taxed and penalized unless an exception applies.
  • You must meet the IRS definition of "first-time homebuyer" — which includes people who haven't owned a home in the past two years — to use the penalty exemption.
  • The withdrawal is reported to the IRS on Form 1099-R, and you claim the exemption on your tax return; the IRA custodian does not file anything on your behalf.

How the $10,000 first-time homebuyer exemption works

The exemption applies to both traditional and Roth IRAs and covers withdrawals made within 120 days of closing on your home. You don't have to use the money immediately — you can withdraw it and hold it for up to four months before closing — but the IRS measures the exemption from the date of withdrawal, not the date of purchase. If you withdraw on January 15 and close on May 20, you're within the window. If you close after May 15, the withdrawal no longer qualifies.

The $10,000 limit is per person, not per couple. If you're married and both have IRAs, each spouse can withdraw up to $10,000, for a combined $20,000. The limit is also a lifetime cap: once you've used $10,000 from any IRA for a first-time home purchase, you cannot withdraw another $10,000 under this exemption, even if you sell the home later and buy another one.

"First-time homebuyer" has a specific IRS definition: you (and your spouse, if married) must not have owned a principal residence during the two-year period ending on the date of purchase. This includes homes you owned jointly with someone else. If you owned a home three years ago and sold it, you now meet the definition. If you owned one two years ago, you do not.

Traditional IRA withdrawals and income tax

When you withdraw from a traditional IRA for a down payment, you avoid the 10% early withdrawal penalty, but you still owe ordinary income tax on the full amount withdrawn. If you withdraw $10,000, that $10,000 is added to your taxable income for the year, and you'll owe tax at your regular rate — which could be 12%, 22%, 24%, or higher depending on your total income and filing status.

The IRA custodian will withhold 20% of the withdrawal for federal income tax unless you request otherwise. If you withdraw $10,000, you'll receive $8,000 and the custodian sends $2,000 to the IRS. When you file your tax return, the IRS calculates how much tax you actually owe on that $10,000. If your total tax bill is higher than $2,000, you'll owe the difference when you file. If it's lower, you'll receive a refund.

You can request that the custodian withhold a different amount or no withholding at all, but this is risky: if you don't have enough withheld and can't pay the tax bill when you file, you'll owe penalties and interest. Most people let the 20% withholding happen and adjust on their tax return.

Roth IRA withdrawals: contributions versus earnings

A Roth IRA works differently because contributions and earnings are treated separately. Contributions are the money you deposited into the account; earnings are the investment gains. You can withdraw your contributions anytime, tax-free and penalty-free, regardless of your age or the reason. If you contributed $5,000 per year for five years and your account is now worth $30,000, you can withdraw the $25,000 in contributions without any tax or penalty.

Earnings, however, are subject to the 10% early withdrawal penalty and income tax if you withdraw them before age 59½ — unless an exception applies. The first-time homebuyer exception covers earnings too, up to the $10,000 lifetime limit. So if your Roth has $25,000 in contributions and $5,000 in earnings, and you need $15,000 for a down payment, you can withdraw all $25,000 in contributions plus $10,000 of the earnings penalty-free (using your lifetime exemption). The remaining $5,000 in earnings stays in the account.

Your IRA custodian's statement shows your contribution basis — the total you've put in. If you're unsure, ask the custodian for a breakdown before you withdraw. The IRS tracks this too, so if you misreport the amount of contributions versus earnings, you may face penalties when you file.

SEP-IRA and Solo 401(k) withdrawals

If you have a SEP-IRA (Simplified Employee Pension) or Solo 401(k) instead of a traditional or Roth IRA, the rules are stricter. SEP-IRAs do not have a first-time homebuyer exemption, so any withdrawal before age 59½ is subject to the 10% penalty plus income tax. A Solo 401(k) may allow a loan against your balance instead of a withdrawal, which avoids the penalty and tax — you borrow from yourself and repay with interest — but the rules vary by plan document, so check with your plan administrator.

If a SEP-IRA or Solo 401(k) is your only retirement savings and you need the money for a down payment, a withdrawal is possible but expensive. A loan, if your plan allows it, is usually the better option. Some people also roll a SEP-IRA into a traditional IRA to access the first-time homebuyer exemption, but this must be done correctly to avoid tax consequences — consult a tax professional before attempting this.

How to request the withdrawal from your custodian

Contact your IRA custodian — the bank, brokerage, or investment firm that holds your account — and ask for a withdrawal form. You'll need to specify the amount and the reason (first-time home purchase). The custodian will ask for your home purchase documentation: typically a signed purchase agreement or a letter from your real estate agent or lender stating the closing date and purchase price. Some custodians ask for a copy of the deed after closing instead.

The withdrawal usually takes three to five business days to process. The custodian sends you a check or deposits the money into your bank account. They also issue Form 1099-R, which reports the withdrawal to the IRS and to you. The form will show the gross amount withdrawn and the amount withheld for tax (if applicable). You receive a copy; the IRS receives a copy.

When you file your tax return, you'll report the withdrawal on Form 8606 (for Roth IRAs) or as part of your IRA income (for traditional IRAs). On the return, you claim the first-time homebuyer exemption, which tells the IRS not to assess the 10% penalty. You still owe income tax on a traditional IRA withdrawal, but the penalty is waived.

What happens if you don't meet the first-time homebuyer definition

If you've owned a home in the past two years, you do not meet the definition and cannot use the $10,000 exemption. Any withdrawal before age 59½ is subject to both the 10% penalty and income tax. A $10,000 withdrawal could cost you $1,000 in penalty plus $2,400 to $3,000 in income tax (depending on your tax bracket), leaving you with $6,000 to $7,000 for your down payment.

If you're in this situation, other options include borrowing from a 401(k) if your employer plan allows it, asking family for a gift, or delaying the purchase until you've been out of homeownership for two years. Some lenders also allow down payment gifts from relatives or allow you to borrow against your home equity if you own property, though these come with their own costs and requirements.

Frequently Asked Questions

Can I withdraw from my IRA if I'm not a first-time homebuyer?

You can withdraw, but you'll owe a 10% penalty plus income tax on the full amount (or on earnings only, if it's a Roth). The exemption is only for first-time buyers. If you owned a home within the past two years, you don't meet the definition.

Do I have to use the full $10,000?

No. You can withdraw $3,000, $7,000, or any amount up to $10,000. The $10,000 is a lifetime cap, so if you withdraw $6,000 now, you can withdraw up to $4,000 more in the future under this exemption. Once you hit $10,000 total across all withdrawals, the exemption is exhausted.

What if I withdraw the money but don't end up buying a home?

You'll owe the 10% penalty and income tax on the withdrawal, even though you didn't buy. The exemption only applies if you actually purchase a home within 120 days. If you withdraw and then cancel the purchase, you cannot put the money back into the IRA to avoid the penalty.

Can I borrow from my IRA instead of withdrawing?

Traditional and Roth IRAs do not allow loans. You can only withdraw. A 401(k) or Solo 401(k) may allow a loan, which lets you borrow from your own balance and repay it with interest, avoiding the penalty and tax. Check your plan document or ask your plan administrator.

How do I report the withdrawal on my tax return?

Your custodian sends you Form 1099-R. You report the withdrawal on Form 8606 (for Roth) or include it in your IRA income (for traditional). On the form, you claim the first-time homebuyer exemption to waive the 10% penalty. You still owe income tax on a traditional withdrawal, but the penalty is removed.