Under the Roth IRA first-time home buyer rules, you can pull your own contributions out at any time, for any reason, with no tax and no penalty. On top of that, you can withdraw up to $10,000 in earnings penalty-free if you meet the IRS definition of a first-time buyer. Whether those earnings also come out tax-free depends on how long your account has been open.
For most buyers, the $10,000 rule never even comes into play. The way Roth withdrawals are ordered means you’ll drain years of contributions before touching a dollar of earnings.
How Roth IRA Withdrawals Are Ordered
When you take money out of a Roth IRA, the IRS treats the dollars as coming out in a fixed sequence:
- Regular contributions first. Always tax-free and penalty-free, regardless of your age or how long the account has been open.
- Conversion and rollover amounts second, oldest first, with the taxable portion of each conversion ahead of the nontaxable portion.
- Earnings last. This is the only layer where the $10,000 first-time homebuyer exception matters.
If you’ve contributed $40,000 to your Roth over the years and need $35,000 for a down payment, every dollar comes out clean. You never invoke the homebuyer rule at all. The exception only becomes relevant once contributions and conversions are exhausted.
Who the IRS Counts as a First-Time Buyer
The definition is more generous than the name suggests. 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. Someone who owned a house six years ago and has been renting since then qualifies again.
The exception also reaches beyond your own purchase. You can use the funds for a principal residence bought by your child, grandchild, parent, or grandparent, and the same two-year test applies to whoever will live there.
The home has to be a principal residence, meaning the main home where the buyer lives most of the time. Vacation homes, rentals, and investment properties are out. The money must go toward qualified acquisition costs: the purchase price, construction costs, usual settlement fees, and financing charges.
The $10,000 Lifetime Cap
The penalty-free earnings withdrawal is capped at $10,000 over your entire lifetime. The limit was set in 1997 and has never been indexed for inflation.
It’s a per-person cap, not per household. If you and your spouse both have Roth IRAs and both qualify as first-time buyers, you can each take $10,000, for a combined $20,000 toward the same home.
The cap is absolute across all your IRAs, both Roth and Traditional. If you already used $6,000 of the exception for a previous qualifying purchase, only $4,000 remains for any future one.
An example of how the pieces stack: say your Roth holds $50,000 in contributions and $15,000 in earnings. All $50,000 in contributions comes out tax-free and penalty-free with no special exception. Then $10,000 of the $15,000 earnings comes out penalty-free under the homebuyer rule. The last $5,000 of earnings would face the 10% early withdrawal penalty even if you use it for the purchase.
Whether the Earnings Also Come Out Tax-Free
The homebuyer exception waives the 10% early withdrawal penalty on up to $10,000 in earnings. It does not automatically waive income tax on those earnings.
To get earnings out completely tax-free, the account must satisfy the five-year rule: it must have been open for at least five tax years. The clock starts on January 1 of the tax year for which you made your first Roth contribution, regardless of when you actually deposited the money. Open your first Roth in April 2023 for the 2022 tax year, and the clock started January 1, 2022, ending after December 31, 2026.
Pull $8,000 of earnings after only three years for a first home, and you skip the $800 penalty but still owe ordinary income tax on the $8,000. If the five-year rule is met, the same $8,000 comes out with no tax and no penalty.
A separate five-year clock runs on each Roth conversion. The homebuyer exception waives the 10% penalty on conversion amounts used for a qualifying purchase, though income tax on the conversion itself was already settled in the year you converted.
The 120-Day Deadline
Withdrawn funds must be used for qualified acquisition costs within 120 days of receiving the distribution. The clock starts the day the money leaves the IRA, not the day you request it. Time the withdrawal close to your expected closing so a delayed title or slow lender doesn’t burn through the window.
Any earnings that aren’t applied to qualified costs within 120 days lose the exception. The 10% penalty applies (plus income tax if the five-year rule hasn’t been met), as if you’d never claimed it.
If the Deal Falls Through
If the purchase is canceled or delayed past 120 days, you can put the money back into the IRA within that same 120-day window. The IRS treats it as a rollover: no tax, no penalty, and no hit to your $10,000 lifetime limit.
Once 120 days pass, the redeposit option is gone and the earnings portion falls back under normal early distribution rules. If a deal starts to wobble, return the funds early and take a fresh distribution later when a new purchase is lined up.
Reporting the Withdrawal
Your custodian will send Form 1099-R. For most first-time buyers under 59½, Box 7 will show distribution code J, “early distribution from a Roth IRA, no known exception.” The custodian doesn’t know why you took the money. You claim the exception yourself at filing.
The form for that is IRS Form 8606, Part III. Line 19 captures your total nonqualified distribution, including the homebuyer withdrawal. Line 20 is where you enter your qualified first-time homebuyer expenses, up to $10,000 reduced by any prior homebuyer distributions. The remaining lines apply the ordering rules to figure out how much, if any, of the withdrawal is taxable earnings.
If earnings exceed $10,000 or you don’t fully qualify, Form 5329 calculates the 10% additional tax on the portion that isn’t excepted. Keep closing documents, settlement statements, and transfer records in case the IRS asks.
What Your Lender Will Want to See
Roth IRA funds are acceptable for a down payment, but lenders need documentation. Under Fannie Mae guidelines, the lender has to verify that you own the account and that the account allows withdrawals. If your assets are held as stocks, bonds, or mutual funds rather than cash, the lender may want proof you actually received the funds, not just that the balance exists.
Pull a current account statement and keep the distribution confirmation from your custodian. Some lenders want the funds seasoned in your bank account for a stretch before closing, so don’t wait until the last minute. Loop in your loan officer early.
Whether It’s Worth Doing
Being allowed to withdraw isn’t the same as needing to. Every dollar pulled from a Roth stops compounding tax-free, and annual contribution limits mean you can’t just replace a large withdrawal in one shot. A $30,000 withdrawal at age 30, at a 7% average annual return, would have grown to roughly $228,000 by age 60.
For a lot of buyers, a smaller Roth withdrawal paired with other sources (an FHA loan with 3.5% down, a conventional loan with private mortgage insurance, or a state first-time buyer program) preserves more of the retirement account while still getting the deal closed. The math can tip toward a larger withdrawal when it eliminates PMI you’d otherwise pay for years, or when a bigger down payment earns a meaningfully lower rate. Run it both ways.