Purchasing a home is one of the most significant financial decisions a person can make. For many, saving for a down payment or finding financing options can be challenging. One potential source of funds is an Individual Retirement Account (IRA). People ask us all the time if they are allowed to use an IRA to purchase a home? Yes, but there are important considerations, tax implications, and specific rules you must follow.
Let’s explore the types of IRAs that allow home purchases, the rules and restrictions, the potential benefits and drawbacks, and whether using an IRA for a home purchase is a smart financial move. BD Nationwide Mortgage will help you understand the home loan requirements when using your IRA and we will help you find the best mortgage lenders.
Understanding IRAs and Their Role in Home Purchases
An Individual Retirement Account (IRA) is a tax-advantaged savings account designed to help individuals save for retirement. There are two main types of IRAs:
- Traditional IRA – Contributions are tax-deductible, and withdrawals are taxed as ordinary income in retirement.
- Roth IRA – Contributions are made with after-tax dollars, but qualified withdrawals are tax-free.
Both types of IRAs can be used for a home purchase, but they have different rules regarding withdrawals, penalties, and taxation.
Using a Traditional IRA to Buy a Home
A Traditional IRA allows for penalty-free withdrawals for a first-time home purchase, but taxes still apply. Read more about first time home buyer mortgages.
Key Rules for Traditional IRA Withdrawals:
- You can withdraw up to $10,000 penalty-free for a first-time home purchase.
- The $10,000 limit is a lifetime cap—you cannot withdraw another $10,000 for a second home purchase.
- You will still need to pay income tax on the amount withdrawn.
- You must use the funds within 120 days of withdrawal to qualify for the exemption.
Since withdrawals from a Traditional IRA are treated as taxable income, they may increase your overall tax liability for the year.
Using a Roth IRA to Buy a Home
A Roth IRA offers more flexibility for home purchases because contributions (not earnings) can be withdrawn tax-free at any time.
Key Rules for Roth IRA Withdrawals:
- You can withdraw your contributions tax-free at any time.
- You can withdraw up to $10,000 of earnings tax-free and penalty-free if the account has been open for at least 5 years.
- If you withdraw earnings before 5 years, you may owe income tax but not the 10% penalty.
Since Roth IRA contributions are made with after-tax dollars, withdrawals for a home purchase can be a tax-efficient way to fund a down payment.
Who Qualifies as a First-Time Homebuyer?
The IRS defines a first-time homebuyer as someone who has not owned a home in the past two years. This rule applies to both the Traditional and Roth IRA home purchase exceptions. Even if you owned a home in the past, you may still qualify as a first-time homebuyer if you haven’t held ownership in the last 24 months.
Pros and Cons of Using an IRA for a Home Purchase
Pros:
✅ Access to Funds Without Loans – Using an IRA allows you to tap into savings without borrowing or taking on additional debt.
✅ Penalty-Free Withdrawals – For first-time homebuyers, the IRS provides an exemption from the 10% early withdrawal penalty (up to $10,000).
✅ Roth IRA Tax Benefits – Withdrawing contributions tax-free can help fund a home purchase without affecting your taxable income.
✅ Avoids PMI (Private Mortgage Insurance) – A larger down payment from an IRA withdrawal may help you avoid PMI, reducing long-term mortgage costs.
Cons:
❌ Loss of Retirement Savings – Withdrawing from your IRA reduces retirement funds, which could impact long-term financial security.
❌ Taxes on Traditional IRA Withdrawals – If using a Traditional IRA, withdrawals count as taxable income, potentially pushing you into a higher tax bracket.
❌ Strict Withdrawal Limits – The $10,000 cap may not be enough for a significant down payment, requiring additional funds from other sources.
❌ Market Timing Risks – Selling IRA assets for a withdrawal may mean missing out on future investment growth if the market performs well.
Alternative Ways to Use Retirement Funds for a Home Purchase
If using an IRA does not seem like the best option, consider these alternative methods:
1. 401(k) Loan
- Some employer-sponsored retirement plans allow you to borrow against your 401(k) to fund a home purchase.
- Loans must be repaid within five years.
- Interest is paid back to yourself, but missed payments may result in tax penalties.
2. Down Payment Assistance Programs
- Many states and local governments offer first-time homebuyer grants or low-interest loans to assist with down payments.
- These programs do not require tapping into retirement funds.
3. Gifted Funds from Family
- Some lenders allow family members to gift money for a down payment.
- No tax penalties apply, and it does not impact retirement savings.
Should You Use Your IRA to Buy a Home?
The decision to use an IRA for a home purchase depends on your financial situation, retirement goals, and homeownership plans.
When It Makes Sense:
✔ You need additional funds to complete a down payment and want to avoid high-interest debt.
✔ You have ample retirement savings and can afford to withdraw without impacting long-term security.
✔ You qualify for a Roth IRA withdrawal, minimizing taxes.
✔ You want to avoid private mortgage insurance (PMI) by increasing your down payment.
When It Doesn’t Make Sense:
❌ You do not have enough retirement savings to withdraw without jeopardizing future financial security.
❌ You have alternative funding sources, such as a 401(k) loan, assistance programs, or savings.
❌ You would incur high taxes from withdrawing Traditional IRA funds.
Using an IRA to purchase a home can be a viable option for first-time homebuyers, but it should be approached with caution. While it provides access to penalty-free funds, the impact on long-term retirement savings must be carefully weighed.
If you are considering this strategy, consult with a financial advisor or tax professional to ensure it aligns with your overall financial goals.
FAQs for Home Buying with Money from Your IRA
What Qualifies as a First-Time Homebuyer for IRA Withdrawal?
The IRS defines a first-time homebuyer as someone who has not owned a home in the past two years. This rule applies to both Traditional and Roth IRAs for penalty-free withdrawals. The definition extends to you, your spouse, children, or parents, meaning funds can be used to help family members buy a home. Even if you owned a home previously, you may still qualify if you haven’t held ownership within the last 24 months.
What Is the IRA Exception for First-Time Homebuyers?
The IRA first-time homebuyer exception allows individuals to withdraw up to $10,000 from a Traditional or Roth IRA without incurring the 10% early withdrawal penalty, provided the funds are used for a home purchase. The money must be used within 120 days of withdrawal. With a Roth IRA, earnings can also be withdrawn tax-free if the account has been open for at least five years.
References:
Internal Revenue Service. (2025). Retirement Topics – IRA Withdrawals for First-Time Homebuyers.
U.S. Securities and Exchange Commission. (2025). Understanding Individual Retirement Accounts (IRAs). Retrieved from https://www.sec.gov