Roth IRA Down Payment for First-Time Buyers: The $10,000 Rule

You can use a Roth IRA for a down payment, and it is often the most tax-efficient retirement account to tap for that purpose. Your contributions can be withdrawn at any time, at any age, for any reason, with no taxes and no penalties. On top of that, the tax code lets you pull up to $10,000 in investment earnings out penalty-free under a first-time homebuyer exception.¹ The line between those two buckets, contributions and earnings, controls how much you can access and what it will cost you.

How Much You Can Actually Take Out

The $10,000 figure everyone quotes applies only to earnings. Your contributions have no withdrawal cap. Because you already paid income tax on the money before it went in, you can pull those dollars back out with zero tax and zero penalty, at any age.²

If you have been contributing $7,000 or $7,500 a year for several years, you may already have tens of thousands of dollars in contributions sitting in the account, and all of it is available for a down payment without ever touching the homebuyer exception.

The order is fixed by statute. Withdrawals come out of regular contributions first, then out of any amounts converted or rolled over from another retirement account, and only then out of investment earnings.³ You do not choose. The IRS treats every dollar leaving the account as coming from contributions until those are exhausted.

Say you have put in $35,000 over the years and the account is now worth $48,000. The first $35,000 you take out is contributions: tax-free, penalty-free, no exception needed. Only after that would you start pulling from the $13,000 in earnings, and only there does the first-time homebuyer exception matter. A lot of buyers never reach the earnings layer at all.

The $10,000 Earnings Exception and the Five-Year Rule

Once a withdrawal reaches the earnings portion of your Roth IRA and you are under 59½, you would normally owe a 10% early withdrawal penalty plus income tax. The first-time homebuyer exception waives that 10% penalty on up to $10,000 in earnings.⁴ That cap is a lifetime cap, not an annual one. Use it, and it is gone.

Whether income tax also applies to those earnings depends on the five-year rule. The clock starts on January 1 of the first tax year you funded any Roth IRA, and runs for five full tax years. Open and fund your first Roth in March 2022, and the five-year period ends January 1, 2027.

Two scenarios:

Five-year rule met. Earnings withdrawn under the homebuyer exception, up to $10,000, are fully tax-free and penalty-free as a qualified distribution.⁵
Five-year rule not met. The 10% penalty is still waived, but the earnings are included in your taxable income for the year. Pull $8,000 in earnings while in the 22% federal bracket, and you owe roughly $1,760 in income tax.

The $10,000 limit is per person. A married couple buying together can each apply the exception to their own Roth IRAs, for up to $20,000 in combined earnings free of penalty.¹ Each spouse’s five-year clock runs independently.

You report the distribution on Form 8606, which breaks out contributions from earnings and designates the withdrawal as a qualified homebuyer distribution.⁶

Who Counts as a First-Time Homebuyer

The tax code’s definition is more forgiving than the phrase suggests. You do not have to have never owned a home. You qualify as long as you have had no ownership interest in a principal residence during the two-year period ending on the date you acquire the new home.⁴ Someone who sold three years ago and has been renting since qualifies. Someone who owned rental property but never lived in it can qualify too, since the lookback covers only your principal residence.

If you are married, both spouses have to clear the two-year lookback. If either of you owned a principal residence within that window, neither of you qualifies. This trips up couples where one spouse sold a home shortly before the marriage.

You also do not have to be the buyer. The statute lets you withdraw to help pay for a principal residence being bought by your spouse, your child or grandchild, or a parent or grandparent of you or your spouse.⁴ The family member buying the home is the one who has to satisfy the two-year lookback, not you. But the $10,000 lifetime cap still runs against your limit as the account owner.

The home must be a principal residence, meaning the place where you (or the qualifying family member) actually live. Vacation homes and pure investment properties do not qualify. The property type itself is flexible: condos, townhomes, co-ops, mobile homes, and similar structures can all count as long as they serve as the primary home.⁷ A duplex or small multi-unit property where you occupy one of the units can still qualify as your principal residence.

The 120-Day Spending Deadline

Once the money leaves the account, a hard clock starts. You have 120 days from the day you receive the distribution to use it on qualified acquisition costs.⁴ Closing delays, appraisal issues, and title problems do not extend that deadline.

Qualified acquisition costs cover the down payment plus the usual settlement charges, financing fees, and closing costs tied to buying, building, or rebuilding a home.⁸ Lender origination fees, title insurance, and recording fees all count. The funds do not have to go only to the down payment itself.

If the deal falls apart, there is one escape. You can roll the unused funds back into an IRA within that same 120-day window and avoid the tax and penalty consequences. Miss it, and the earnings portion is treated retroactively as a non-qualified withdrawal: 10% penalty on the earnings, plus income tax if the five-year rule was not satisfied. Time the withdrawal to a reasonably firm closing date, not to the day you start house-hunting.

Roth IRA Versus Traditional IRA for This Purpose

Both account types get the same $10,000 first-time homebuyer penalty exception, but the tax bill looks very different. With a Traditional IRA, every dollar you withdraw is taxable as ordinary income, because the contributions were deductible going in. The exception waives the 10% penalty and does nothing about income tax. A $30,000 Traditional IRA withdrawal for a down payment adds $30,000 to your taxable income and can push you into a higher bracket.

A Roth is far more efficient. The contribution portion comes out tax-free no matter what, and the earnings portion (up to $10,000) can also be tax-free if the five-year rule is met.⁵ The same $30,000 withdrawal from a Roth, if it is mostly contributions, can generate zero taxable income. If you have money in both, tap the Roth first.

How Mortgage Lenders Treat the Withdrawal

Getting the money out is one problem. Proving to a lender that it is an acceptable source of funds is another.

For conventional loans, Fannie Mae’s selling guide lists vested IRA funds, including Roth IRAs, as acceptable sources for the down payment, closing costs, and reserves. The lender has to verify that you own the account, that the funds are vested, and that withdrawals are permitted regardless of employment status.⁹ If the account holds stocks or mutual funds instead of cash, expect a request for documentation of the current liquidation value.

FHA loans start from a more conservative default. The FHA handbook lets lenders count only 60% of retirement account assets toward closing requirements unless you document that a higher percentage is actually available after taxes and penalties.¹⁰ For Roth contributions, where there is no tax or penalty on withdrawal, statements and a clear breakdown of contributions versus earnings should satisfy that.

One practical move: pull the funds and get them into your checking or savings account well before closing, and keep the paper trail. Lenders want a clean source-of-funds chain. A distribution that lands in your bank the same week as closing raises more questions than one that has been sitting there for a month with a matching IRA distribution statement.

What It Costs Your Retirement

Money you pull for a down payment does not just leave your account today. It leaves your retirement thirty or forty years from now, and the gap is larger than most people expect. A $10,000 withdrawal at age 30, left alone at a 7% average annual return, would have grown to roughly $76,000 by age 60. At $30,000, the same math produces about $228,000 in forgone retirement savings.

Unlike a 401(k) loan, a Roth IRA withdrawal is permanent. There is no repayment mechanism. You can keep making new annual contributions (up to $7,500 for 2026 if you are under 50), but you cannot put $30,000 back in to replace what came out. At the annual contribution limit, it would take four years of maxing out just to restore the balance, and you would never recapture the growth on the years the money was out of the market.

The calculation is not always one-sided. If tapping the Roth lets you avoid private mortgage insurance, secure a better rate, or buy in an appreciating market, the equity you build offsets some of the retirement shortfall. It also matters how large the withdrawal is relative to the account. Pulling $10,000 from a $200,000 Roth barely moves the needle. Emptying a $25,000 account to scrape together a minimum down payment is a different decision. Even when you stay inside the contribution layer and never touch earnings, every dollar you take is a dollar of tax-free retirement growth you have given up.

1
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
2
Internal Revenue Service. Roth IRAs
3
GovInfo. 26 USC 408A – Roth IRAs
4
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
5
Internal Revenue Service. Publication 590-B, Distributions from Individual Retirement Arrangements
6
Internal Revenue Service. About Form 8606, Nondeductible IRAs
7
eCFR. 26 CFR 1.44-5 – Definitions
8
GovInfo. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
9
Fannie Mae. Retirement Accounts
10
HUD. FHA Single Family Housing Policy Handbook