Using Your Retirement Savings to Buy a Home

How retirement accounts can fund a down payment

You can withdraw money from a traditional IRA, Roth IRA, or 401(k) to pay for a down payment, but the rules differ by account type and your age. The IRS allows first-time homebuyers to take up to $35,000 from a Roth IRA over a lifetime without the usual 10% early withdrawal penalty. Traditional IRAs let first-time buyers withdraw up to $10,000 penalty-free (though you still owe income tax on the withdrawal). 401(k) plans don't have a first-time buyer exception — you can borrow against your balance or take a hardship withdrawal, but both come with taxes and penalties unless you meet specific conditions.

The real cost of using retirement money isn't just the taxes you pay now. It's the decades of compound growth you lose on that money. A $50,000 withdrawal at age 35 could grow to $400,000 or more by age 65, depending on market returns. That lost growth is permanent — you can't make it back by contributing more later, because contribution limits don't increase to compensate.

Key Takeaways

• Roth IRAs allow first-time homebuyers to withdraw up to $35,000 penalty-free over a lifetime, though you must have owned the account for at least five years.
• Traditional IRAs let first-time buyers withdraw up to $10,000 penalty-free, but you pay income tax on the full amount withdrawn.
• 401(k) loans and hardship withdrawals carry taxes, penalties, and the risk of owing the full balance immediately if you leave your job.
• Money withdrawn from retirement accounts stops growing, so the true cost includes decades of lost compound growth, not just current taxes.
• The IRS defines "first-time homebuyer" as anyone who has not owned a primary residence in the past two years, even if you've bought homes before.

Roth IRA withdrawals for a down payment

A Roth IRA is the most flexible retirement account for down payment money because you can withdraw your contributions (the money you put in) at any time without penalty or tax. You only pay taxes and penalties on the earnings (the growth). For first-time homebuyers, the IRS also waives the 10% early withdrawal penalty on up to $35,000 of earnings, though you still owe income tax on those earnings.

To use this rule, you must have owned the Roth IRA for at least five tax years. If you opened the account three years ago, you cannot use the first-time buyer exception yet — you can only withdraw your contributions. The $35,000 limit is per person, so a married couple can each withdraw $35,000 if both have Roth IRAs that meet the five-year rule.

The five-year clock starts on January 1 of the year you open the account, not on the day you fund it. If you opened a Roth IRA on December 31, 2019, you could use the first-time buyer exception starting January 1, 2024. If you opened one on January 1, 2020, you could use it starting January 1, 2025.

Traditional IRA withdrawals and the tax bill

Traditional IRAs allow first-time homebuyers to withdraw up to $10,000 penalty-free, but there is no five-year waiting period — you can do this as soon as you need it. The catch is that you owe income tax on the full $10,000 at your regular tax rate. If you are in the 22% tax bracket, that $10,000 withdrawal costs you $2,200 in federal tax, plus any state income tax your state charges.

The $10,000 limit is per person for your lifetime. If you withdraw $10,000 at age 35 to buy your first home, you cannot withdraw another $10,000 penalty-free later, even if you sell that home and buy another. This is a one-time allowance, not an annual limit.

If you have both a traditional IRA and a SEP IRA or SIMPLE IRA, the $10,000 limit applies across all of them combined. You cannot withdraw $10,000 from each account. The IRS treats them as a single pool for this purpose.

401(k) loans versus hardship withdrawals

A 401(k) plan does not have a first-time homebuyer exception, so you have two options: borrow against your balance or take a hardship withdrawal. A loan lets you borrow up to 50% of your vested balance (or $69,000, whichever is less) and repay it over five years. You pay yourself back with interest, so the money stays in your retirement account and continues to grow. The downside is that if you leave your job, most plans require you to repay the full loan within 60 days or face taxes and a 10% penalty on the unpaid balance.

A hardship withdrawal lets you take money out without repaying it, but you owe income tax on the full amount plus a 10% early withdrawal penalty (unless you are 59½ or older). The IRS defines "hardship" narrowly — down payment funds don't automatically may have access to. You must show the withdrawal is for an immediate and heavy financial need and that you have no other way to pay for it. Your plan administrator decides whether your situation meets this test, and different employers interpret the rules differently.

If you take a hardship withdrawal of $30,000 and you are in the 22% tax bracket, you owe $6,600 in federal tax plus $3,000 in the 10% penalty, for a total of $9,600. You receive only $20,400 of the $30,000 you withdrew.

The five-year rule and account age requirements

Both Roth and traditional IRAs have age-based rules that affect when you can use them for a down payment. For a Roth IRA, the five-year rule means the account must have existed for five tax years before you can withdraw earnings penalty-free. This applies even if you are over 59½. For a traditional IRA, there is no five-year requirement — you can withdraw $10,000penalty-free as soon as you open the account, as long as you meet the first-time buyer definition.

The IRS defines a first-time homebuyer as someone who has not owned a primary residence at any point during the two-year period ending on the date of purchase. If you owned a home five years ago but sold it, you still count as a first-time buyer. If you owned a home two years ago, you do not.

Tax filing and reporting the withdrawal

When you withdraw from a traditional IRA for a first-time home purchase, the IRS does not automatically know it qualifies for the penalty waiver. You must report it correctly on your tax return. Your IRA custodian will send you a Form 1099-R showing the withdrawal amount. On your tax return, you report the full amount as income, then claim the penalty waiver on Form 5329 (Report of Self-Employment Tax and Additional Taxes). If you do not file Form 5329, the IRS may assess the 10% penalty even though you may have access to for the waiver.

For a Roth IRA, the tax reporting is simpler if you are only withdrawing contributions — there is no tax or penalty, and you do not need to report it. If you withdraw earnings using the first-time buyer exception, your custodian reports it on Form 1099-R, and you report it on your tax return and Form 5329 to claim the penalty waiver.

Comparing retirement withdrawals to other down payment sources

Before withdrawing from retirement savings, consider whether other sources are available. Down payment assistance programs, gifts from family, and loans from family members do not reduce your retirement balance or trigger taxes. Some employers offer down payment matching programs or loans at favorable rates. FHA loans require only 3.5% down, and some state programs cover down payments for first-time buyers in specific income ranges.

If you must choose between a retirement withdrawal and a personal loan, calculate the total cost of each. A $30,000 personal loan at 10% interest over five years costs about $7,930 in interest. A $30,000 Roth IRA withdrawal (if you have the balance and meet the five-year rule) costs nothing in taxes or penalties, but it costs you the growth that $30,000 would have earned over the next 30 years — potentially $200,000 or more. A $30,000 traditional IRA withdrawal costs $6,600 in tax (at 22%) plus the lost growth. The personal loan is often cheaper than it appears when you factor in the retirement growth you keep.

Frequently Asked Questions

Can I withdraw from my spouse's IRA if mine is not old enough?

Each person's IRA is separate for the five-year rule. If your spouse's Roth IRA is five years old and yours is not, your spouse can withdraw up to $35,000 penalty-free. You can only withdraw your contributions from your own account. The same applies to traditional IRAs — each person has a separate $10,000 limit.

What happens if I withdraw from my 401(k) and then leave my job?

If you took a 401(k) loan, you typically have 60 days to repay it after leaving your job. If you do not repay it, the unpaid balance is treated as a withdrawal and you owe income tax plus the 10% early withdrawal penalty. If you took a hardship withdrawal, you already owe the taxes and penalty — leaving your job does not change that.

Can I use the first-time buyer exception more than once?

For traditional IRAs, the $10,000 limit is per person for your entire lifetime — you can use it only once. For Roth IRAs, the $35,000 limit is also per person for your lifetime. If you are married and both have Roth IRAs, you each have a separate $35,000 allowance.

Do I have to report the withdrawal to my lender?

Yes. Mortgage lenders ask where your down payment money comes from. You must disclose retirement account withdrawals. Some lenders have specific rules about retirement withdrawals — they may require documentation showing the withdrawal was penalty-free, or they may count the withdrawal as income on your tax return and adjust your debt-to-income ratio. Ask your lender before you withdraw.

What if I withdraw the money but don't buy a home?

If you withdraw from a traditional IRA using the first-time buyer exception but do not purchase a home within 120 days, you can roll the money back into an IRA to avoid taxes and penalties — but only if you do it within 120 days. For Roth IRAs, if you withdraw earnings and do not buy a home, you owe income tax and the 10% penalty on those earnings. There is no 120-day window to undo it.