Using an IRA to buy a house: what's allowed, what it costs

The $10,000 exception is an IRA rule, not a 401(k) rule

Money can always leave an IRA. No gatekeeper, no plan administrator, no need test — you can request a distribution tomorrow and use it for anything. The only question is the bill. Before 59½ an IRA distribution is normally ordinary income plus a 10% additional tax under IRC §72(t), and the list of exceptions to that 10% is where a home purchase enters the picture.

The relevant carve-out is IRC §72(t)(2)(F), "distributions from certain plans for first home purchases." The IRS restates it in Topic no. 557 as a distribution "not in excess of $10,000 used in a qualified first-time home purchase." Note the caps and the wording, because both matter:

• $10,000 is a lifetime limit per person, not per house and not per year. It is not indexed to inflation, so it buys less every year. Two spouses who each have an IRA each get their own $10,000.
• It waives the 10% only. Income tax is untouched — see the math below.
• It exists only for IRAs. The statute says "distributions to an individual from an individual retirement plan." Topic 557 covers traditional and Roth IRAs and lists the first-home exception; Topic no. 558, which covers 401(k)s and other employer plans, does not. Withdraw from a 401(k) to buy a house before 59½ and you pay the 10% — full stop, unless a different exception applies. The full exception map, plan versus IRA, is in the 401(k) early withdrawal penalty guide.

That third point is worth repeating because it is repeated wrongly everywhere, sometimes by HR departments: there is no first-time homebuyer exception in a 401(k). There is a route — roll the plan to an IRA first, if you are eligible to move the money — but that is a different transaction, and it is not available while most people are still employed.

What counts as a "first" home

"First-time homebuyer" is a term of art and is far more generous than it sounds. Under §72(t)(8), you are a first-time homebuyer if you — and your spouse, if you are married — had no present ownership interest in a principal residence during the two-year period ending on the date of acquisition. Someone who owned a house, sold it three years ago and has rented since is a first-time homebuyer for this purpose. Someone buying their fourth house who has never gone two years without owning is not.

Four more details, each of which quietly disqualifies people:

• The date of acquisition is the date you enter into a binding contract to buy, or the date construction or reconstruction begins — not the closing date. The two-year lookback runs backwards from that date.
• The 120-day rule. The distribution must be used within 120 days of receipt on qualified acquisition costs. Take the money too early and you can blow the exception on timing alone.
• Qualified acquisition costs are the costs of acquiring, constructing or reconstructing a residence, including usual and reasonable settlement, financing and other closing costs. Furniture and moving trucks are not.
• It need not be your own house. The buyer can be you, your spouse, or any child, grandchild, parent or other ancestor of you or your spouse — a genuinely useful provision for grandparents helping with a down payment, subject to the same $10,000 lifetime cap on the IRA owner.

If the purchase falls through, the statute lets you return the money to an IRA within 120 days without it counting as a rollover. Check your facts against the "First home" discussion in IRS Publication 590-B before you request the distribution, not after.

The Roth path — and why it usually wins

If the question is "can I use my Roth IRA to buy a house," the honest answer is that the first-home exception is usually the second thing that helps you, not the first. Roth distributions come out in a fixed order — regular contributions, then conversions oldest first, then earnings — and that ordering does more for a home buyer than the exception ever will.

1. Your regular contributions come out first, tax-free and penalty-free, at any age. You already paid tax on them. There is no first-home test, no 120-day clock, no lifetime cap. Someone who has contributed for a decade may have $60,000 or more of basis available with no tax consequence whatsoever.
2. Conversions come next, oldest first, each with its own five-year penalty clock if you are under 59½.
3. Earnings come last — and this is the only layer where the $10,000 exception does any work.

One nuance is worth the paragraph. A first-home distribution of Roth earnings is penalty-free under §72(t)(2)(F) regardless of how long the account has been open, but it is only tax-free if the distribution is also qualified, which requires your first Roth to have been open five tax years. Young Roth, first-home earnings withdrawal: no penalty, but the earnings are ordinary income. The full ordering mechanics and both five-year clocks are laid out in the Roth IRA early withdrawal penalty guide — read it before you decide how deep into the account to reach.

Traditional IRA math: penalty waived, tax owed

Here is where withdrawing from an IRA to buy a house goes wrong in practice. The exception is described as "penalty-free" so often that people budget the full amount into their down payment, then discover at filing time that a fifth of it belonged to the government.

A worked example. A single buyer earning $85,000 takes $10,000 from a traditional IRA that has no basis, for a qualifying first home, at age 38:

• 10% additional tax: $0 — the first-home exception applies, claimed on Form 5329 with the appropriate exception code.
• Federal income tax at a 22% marginal rate: $2,200.
• State income tax at 5%: $500.
• Net cash at closing: about $7,300.

To actually put $10,000 on the table you would need to distribute roughly $13,700 — but the penalty-free ceiling is $10,000, so the extra $3,700 is a plain early distribution carrying its own 10%. Withholding compounds the confusion: IRA distributions default to 10% federal withholding unless you elect out on Form W-4R, which is usually less than you owe. Fix the number before you request it, not in April. The calculator will price the withdrawal year against the rest of your income, and the withdrawals and taxes guide covers the stacking effect.

One more traditional-side trap: a SIMPLE IRA raided within two years of your first contribution carries a 25% additional tax rather than 10%. The first-home exception still applies, but if it does not fit, the cost is dramatically higher.

The three routes compared

Same goal, three different accounts, three very different bills. This assumes you are under 59½ and the purchase qualifies as a first home.

Sources: IRS Topic 557 (IRAs), Topic 558 (employer plans), Pub. 590-B. Marginal rates are illustrative.

You cannot borrow from an IRA

"Can I borrow from my IRA to buy a house" is one of the most-searched versions of this question and it has a one-word answer: no. A 401(k) may permit a participant loan because the plan holds the assets and the loan is a plan feature. An IRA has no such mechanism. Worse, borrowing from an IRA or pledging it as security for a loan is a prohibited transaction under §4975 — the account, or the pledged portion, is treated as distributed, which can make the entire balance taxable at once.

The only manoeuvre that resembles borrowing is the 60-day rollover: take a distribution, use the cash, and redeposit the same amount into an IRA within 60 days so the distribution is never taxed. People do use it to bridge a purchase. It is genuinely dangerous, for four reasons:

• One per 12 months, across all your IRAs combined. A second attempt inside the window is not a rollover at all — it is a taxable distribution plus, potentially, an excess contribution in the receiving account.
• 60 days means 60 days. A closing that slips a week does not extend it. Self-certified waivers exist for narrow, listed reasons; "the money was spent" is not one of them.
• You must put back the gross amount, including anything withheld, or the shortfall is taxed and penalized.
• The money has to come from somewhere. If the plan is to repay from the mortgage proceeds, the lender's underwriting decides your timeline, not you.

The mechanics, the once-per-year rule and the ways it fails are covered in full in the 60-day rollover rule guide. For a house purchase, treat it as a last resort with a written date-by-date plan, not a casual bridge.

Using an IRA to buy a house after retirement

Everything above concerns the penalty. At 59½ the penalty question disappears entirely — no exception needed, no $10,000 cap, no first-home test, no 120-day clock. Using an IRA to buy a house after retirement is purely a tax and sequencing decision, and that makes it a bigger decision, not a smaller one.

The whole withdrawal is ordinary income in one year, and a large one-off distribution can push you into a higher bracket, pull more of your Social Security into taxable income, and — because IRMAA looks back two years — raise your Medicare premiums later for a purchase you made today. If the house is a plan rather than an emergency, splitting the withdrawal across two tax years, or funding part of it from taxable and Roth money, is usually worth more than any mortgage-rate arbitrage. Model it in the calculator before you commit.

The 401(k) alternatives

If the money is in a 401(k) rather than an IRA, the first-home exception is not available to you, but two other doors are — and one of them is much better than it looks.

• A 401(k) loan. If your plan offers one, you can generally borrow the lesser of $50,000 or 50% of your vested balance, and repayment periods longer than five years are specifically permitted when the loan is used to buy a principal residence. No income tax, no 10%, and the balance is restored as you repay. The risk is separation from employment: leave and the outstanding balance is generally treated as a distribution unless you repay it by your tax filing deadline.
• A hardship withdrawal. "Costs directly related to the purchase of a principal residence" is one of the seven safe-harbor hardship reasons, so many plans allow it. But qualifying for a hardship distribution gets you access — it does nothing to the tax. There is no hardship exception in §72(t): the money is ordinary income and generally carries the 10%. That is the worst combination on this page, and the hardship withdrawal guide explains the mechanics and the gross-up you need if you go ahead anyway.

If you have already left the employer, the calculus changes: money rolled to an IRA becomes eligible for the $10,000 first-home exception, though the rollover has trade-offs — creditor protection, the rule of 55 and net unrealized appreciation all live on the plan side.

Should you? The part nobody prices

The rules answer "may I." They do not answer "should I," and the honest version of that answer is uncomfortable.

Retirement accounts are not just savings; they are tax-sheltered space. Contribution limits are annual and they do not roll forward, so a dollar withdrawn is not a dollar you can put back next year on top of your normal contribution. You lose the dollar, the shelter, and every year of compounding it would have had. As an illustration only: $10,000 left alone for 25 years at a hypothetical 7% annual return would be roughly $54,000; the $13,700 you would actually need to distribute to net $10,000 at closing would be roughly $74,000. Those are arithmetic, not forecasts — actual returns vary, can be negative, and no return is guaranteed.

Which does not make it wrong. A down payment that clears private mortgage insurance or turns a rejected offer into an accepted one can be worth the trade — the point is to make it deliberately. Three questions decide it in practice. Is this the cheapest capital you have? (Roth basis usually is; a traditional IRA at a 32% marginal rate usually is not.) Does the purchase still work without it? If the deal only closes by draining the retirement account, the house is too expensive. Can you rebuild the balance? A 28-year-old with rising income can. A 54-year-old who is behind cannot, and for that buyer the first-home exception is a very expensive convenience.

Buying property inside an IRA is a different thing

One clarification, because the two questions collide in search results. Everything above is about taking money out of an IRA to buy a home you will live in. A self-directed IRA can instead own real estate directly as an investment — no distribution, no tax, no penalty — but the property must be strictly at arm's length: you cannot live in it, your family cannot use it, you cannot do the repairs yourself, and every expense and every dollar of rent must flow through the IRA. A personal residence can never be held this way. If that is the question you actually have, start with the self-directed IRA guide.

Investment risk disclosure: figures illustrating growth are hypothetical arithmetic, not projections. Investments held in an IRA can lose value, past performance does not predict future results, and no rate of return is guaranteed. Tax outcomes depend on your own facts — confirm them with your tax adviser and against the primary sources linked above.