IRA First-Time Home Buyer Withdrawal: Limits, Deadline, and Taxes

Federal tax law lets you take up to $10,000 out of an IRA without paying the 10% early withdrawal penalty when the money goes toward a first home. This IRA first-time home buyer withdrawal exception applies to Traditional, Roth, SEP, and SIMPLE IRAs, and the definition of “first-time” is looser than the phrase suggests. The catch is that the rules on timing, eligible accounts, and reporting are tight enough that a single misstep can wipe out the benefit.¹

Who Counts as a First-Time Home Buyer

You qualify if neither you nor your spouse has owned a principal residence during the two-year period ending on the date you acquire the new home.¹ Someone who owned a home five years ago but has been renting since qualifies. You don’t have to be a lifetime renter.

The purchase doesn’t even have to be yours. You can use the withdrawal to help buy a principal residence for your spouse, a child, a grandchild, a parent, or a grandparent, as long as that person independently meets the two-year test.¹ Siblings, cousins, and friends aren’t on the list.

Eligible properties are broad: condos, co-ops, mobile homes, and raw land where you plan to build all count, as long as the property will be a primary residence for a qualifying person. Investment properties and vacation homes don’t.

How Much You Can Withdraw

The cap is $10,000 over your lifetime, not per home and not per account.¹ Pull $7,000 now and you have $3,000 of penalty-free capacity left for the rest of your life. The limit has not been adjusted for inflation.

Because it applies per person, a married couple where both spouses qualify can take up to $20,000 combined from their own respective IRAs. Each spouse claims the exception individually.

The 120-Day Deadline

Once the money leaves your IRA, you have 120 days to spend it on qualified acquisition costs. Those include what you pay to acquire, construct, or reconstruct the residence, along with settlement fees, financing charges, and typical closing costs.¹

This is where most people get burned. If closing slips past the 120-day window, any unspent portion loses its protected status. The IRS then treats the leftover as a regular early withdrawal, so you owe both income tax and the 10% penalty on that money. Your only escape is rolling the unused funds back into an IRA before the 120 days expire. There is no extension and no hardship waiver. Track the distribution date carefully and build buffer into your timeline.

Which IRA You Withdraw From Changes What You Save

The exception waives the 10% penalty. It does not waive income tax. That distinction is the whole story on which account to tap.

Traditional IRA

A Traditional IRA withdrawal is always subject to ordinary income tax, exception or not.² A $10,000 withdrawal adds $10,000 to your taxable income for the year. In the 22% federal bracket, that’s roughly $2,200 in federal tax alone, before any state income tax. Budget for it, because many people are caught off guard at filing time.

Roth IRA

Roth IRAs are the better account to tap when you have the choice. Distributions come out in a fixed order: contributions first, then conversions, then earnings. Contributions were already taxed, so pulling them is always tax-free and penalty-free with no exception needed.

The $10,000 exception matters for the earnings layer. If the account hasn’t been open five years, earnings would normally face both income tax and the 10% penalty; the exception removes the penalty on up to $10,000 of earnings.³ If the account has met the five-year requirement, earnings under the $10,000 cap come out tax-free and penalty-free.

SEP and SIMPLE IRAs

SEP and SIMPLE IRAs qualify too.³ Tax treatment mirrors a Traditional IRA: no 10% penalty on up to $10,000, but the full withdrawal is taxable as ordinary income.

SIMPLE IRAs carry an extra risk. If you’ve been in the plan less than two years, the early withdrawal penalty is 25%, not 10%. The exception waives whatever penalty applies, but a timing mistake on a SIMPLE that hasn’t cleared the two-year mark can turn into a much larger problem if the IRS disputes your exception claim.

401(k) Plans Do Not Qualify

This is the most common misunderstanding about the rule. The exception applies only to IRAs. It does not apply to 401(k) plans, 403(b) plans, or other employer-sponsored retirement accounts.³ If your retirement savings sit primarily in a 401(k), you cannot use this provision on that money.

Rolling 401(k) funds into a Traditional IRA and then taking the home buyer distribution is technically possible. It adds complexity, though: the rollover must complete before you take the distribution, and you have to fit everything inside the 120-day acquisition window. Talk to a tax professional before starting either transaction.

Watch the Withholding

When you request an IRA distribution, the custodian typically withholds 10% for federal income tax unless you elect a different rate or opt out. On a $10,000 Traditional IRA withdrawal, you’d receive $9,000 in hand but still owe tax on the full $10,000.

If you need the full $10,000 at closing, either request a larger gross distribution to cover the withholding or opt out. Opting out puts more cash in your pocket now, but you owe the income tax at filing and could face an underpayment penalty if you didn’t plan for it.

Reporting the Withdrawal at Tax Time

Your custodian will send Form 1099-R for the full distribution. The form is often coded as an early distribution, which is accurate but doesn’t reflect the exception you’re claiming.⁴

To claim the penalty waiver, file Form 5329 with your return and enter the exception code for a first-time home buyer distribution under IRC Section 72(t)(2)(F).³ Without Form 5329, the IRS will assess the 10% penalty automatically based on the 1099-R coding.

Roth IRA distributions also need Form 8606. Part III reports the distribution and separates contributions, conversions, and earnings so the correct amount is taxed.⁵ If you have nondeductible contributions in a Traditional IRA, Part I of the same form tracks your basis so you aren’t taxed twice on money you already paid tax on.⁶

What This Really Costs You

The waiver makes the withdrawal feel cheap. It isn’t. Money pulled from an IRA at 30 loses decades of tax-deferred compounding. The exception saves $1,000 in penalties on a $10,000 withdrawal. The lost growth is a different order of magnitude.

That’s not an argument against using the exception. Getting into a home builds equity, and getting there sooner has real value. But treat this as a last resort after options that leave retirement funds alone. If you do proceed, pull from a Roth IRA where contributions come out tax-free first, and rebuild the balance as aggressively as your contribution limits allow in the years after.

1
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
2
Internal Revenue Service. Topic No. 557, Additional Tax on Early Distributions From Traditional and Roth IRAs
3
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
4
Internal Revenue Service. About Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
5
Internal Revenue Service. Form 8606 – Nondeductible IRAs
6
Internal Revenue Service. Instructions for Form 8606 – Nondeductible IRAs