The Roth IRA first home purchase exception lets you withdraw up to $10,000 in earnings penalty-free to buy, build, or rebuild a primary residence within 120 days. Your contributions are always available tax and penalty-free. This powerful IRS exception helps bridge the gap to homeownership while preserving long-term retirement growth through Finhabits’ automated investment tools.
Quick Takeaways
- You can withdraw all Roth IRA contributions anytime tax and penalty-free; only earnings have restrictions.
- First-time homebuyer exception: access up to $10,000 in earnings penalty-free with a strict 120-day use window.
- If your Roth IRA is 5+ years old, qualifying first-home earnings withdrawals can be completely tax-free; if under 5 years, earnings may still be taxable.
- This exception applies to homes for you, your spouse, child, grandchild, or parent (opening multiple strategic possibilities).
- Consider the opportunity cost carefully—every $10,000 withdrawn today could mean $40,000+ less at retirement based on market growth.
What is the Roth IRA first home purchase rule?
The IRS created a special exception that allows a penalty-free withdrawal from your Roth IRA specifically for first-time homebuyers. You can use up to $10,000 of earnings without facing the typical 10% early withdrawal penalty when buying, building, or rebuilding a primary residence—as long as you use the funds within 120 days of receiving them.
However, “first-time” doesn’t literally mean your first home ever. The IRS defines a first-time homebuyer as someone (and your spouse, if married) who hasn’t had ownership interest in a principal residence during the two-year period ending on the acquisition date. The $10,000 cap applies to earnings over your lifetime, not per transaction or per account. This exception extends beyond just your home purchase—it can help a spouse, child, grandchild, or parent buy a qualifying home too.
Here’s why this matters: Used thoughtfully, this exception can bridge the gap for your down payment or closing costs without derailing your retirement. The key is balancing immediate homeownership goals with your long-term financial future.
Who benefits most: First-time buyers with established Roth balances; married couples who can coordinate two $10,000 exceptions; parents helping adult children purchase homes; and investors who want to preserve emergency savings while still funding their home purchase.
Sources: IRS Publication 590‑B (2025), IRS — Roth IRAs overview.
How Roth IRA home withdrawal rules work in 2025
Understanding contribution vs. earnings withdrawals
The IRS follows a specific “ordering rule” for Roth IRA distributions. Your regular contributions come out first (always tax and penalty-free). Then come conversions/rollovers (with special rules), and finally, earnings. The first-time homebuyer exception only applies to earnings, up to the $10,000 lifetime limit.
This means you can potentially fund a significant portion of your home purchase using just contributions with no tax or penalty consequences whatsoever, then tap up to $10,000 of earnings under the exception if needed for additional funds.
Finhabits Tip: Check your Roth IRA statement to identify your total contributions versus earnings. With Finhabits, you can easily view this breakdown in your account dashboard to determine exactly how much you can withdraw penalty-free.
The critical Roth IRA 5-year rule for homebuyers
Understanding the difference between avoiding the 10% penalty and avoiding taxes is crucial. The first-time homebuyer exception waives the 10% penalty on up to $10,000 of earnings. Whether those earnings are also tax-free depends on the 5-year clock for Roth IRAs (measured from January 1 of the year you first contributed to any Roth IRA).
- Roth IRA is 5+ years old: Earnings used for a qualifying first-home purchase can be both penalty-free and completely tax-free (up to $10,000).
- Roth IRA under 5 years: Earnings can still be penalty-free but will be taxed as ordinary income.
IRS Publication 590‑B provides detailed guidance on qualified distributions and the 5‑year rule.
The 120-day window: Timing details most buyers miss
- Strict 120-day use requirement: For this to be considered a first-time home buyer distribution, you have to use the funds toward home purchase costs before the end of the 120th day after you receive them.
- Deal falls through option: Unfortunately, sometimes home purchases or construction falls through. In that case, you can avoid an early distribution penalty by contributing the amount withdrawn within 120 days of the original distribution. This creates a safety net if your transaction doesn’t close.
- Qualified costs limitations: The exception only covers purchase price and customary closing costs directly tied to buying, building, or rebuilding your primary residence.
Who else qualifies under your exception
One of the most flexible aspects of this rule is that you can use your exception to help family members. You can withdraw funds penalty-free to buy, build, or rebuild a primary home for:
- Yourself
- Your spouse
- Your child
- Your grandchild
- Your parent (or ancestor)
The same two-year “first-time” test applies to the person for whom the home is being purchased. This creates strategic opportunities for parents helping adult children or adult children helping elderly parents secure housing.
Real-world scenario: How the numbers work
Let’s walk through a hypothetical example:
Assume you’ve contributed $15,000 to your Roth IRA over several years, and it’s now worth $21,000 (so $6,000 represents earnings). Your Roth IRA is 3 years old. You decide to withdraw $18,000 for a down payment within 120 days.
- $15,000 (contributions): Completely tax and penalty-free (as all contributions are).
- $3,000 (earnings portion): Penalty waived under the first-time homebuyer exception; likely taxable because your Roth is under 5 years old.
- Future flexibility: You still have up to $7,000 of the $10,000 lifetime earnings exception available for a future qualified purchase.
Important: The $10,000 first-time homebuyer exemption is actually a lifetime limit that applies across all of your IRAs combined, not per account. So unfortunately, you can’t withdraw $10,000 from your Roth and another $10,000 from your traditional IRA penalty-free – you’re limited to $10,000 total.
Step-by-step: Using your Roth IRA for a first home purchase
- Verify first-time status: Confirm no principal residence ownership interest in the last 2 years for you (and spouse, if married).
- Calculate contributions vs. earnings: Review your Roth IRA statements to determine how much you’ve contributed versus what portion is earnings—plan to use contributions first since they have no restrictions.
- Plan withdrawal amount: Decide how much of your earnings (if any) you’ll need under the $10,000 exception.
- Check your 5-year clock: If your Roth is under 5 years old, budget for potential taxes on any earnings you withdraw.
- Time your distribution carefully: Schedule the withdrawal so funds will be used within the critical 120-day window.
- Gather documentation: Collect purchase agreement, closing disclosure, and wiring instructions as proof of qualified costs.
- Request withdrawal: Complete your Roth IRA distribution form with Finhabits or your current provider.
- Maintain records: Keep all documentation showing the qualified costs and timing in case of IRS questions later.
Helpful resources for navigating the homebuying process:
- CFPB Owning a Home tools — Compare loan options and understand the mortgage process
- HUD — Buying a Home programs and counseling — Find local assistance programs
- Fannie Mae HomeView — Free, comprehensive homebuyer education
- Finhabits Compound Interest Calculator — Understand the long-term impact of your withdrawal
Documents you’ll need: Complete checklist
- Roth IRA statement showing contributions and current balance (available in your Finhabits dashboard)
- Distribution request form from your IRA provider (withdrawal or wire form)
- Purchase agreement or builder contract showing the property and purchase price
- Closing Disclosure or settlement statement detailing all transaction costs
- Wiring instructions for escrow/closing agent to receive funds
- Government ID and address verification to process the withdrawal
- Evidence of first-time status (affidavit or prior tax returns if requested)
- IRS Form 5329 for tax filing if you qualify for an exception but your 1099-R doesn’t show it
Trade-offs: Roth IRA withdrawal vs. other options
Withdrawing from your Roth IRA has serious long-term implications. Based on historical market performance, even a modest $10,000 withdrawal today could translate into $40,000–$70,000 less in your retirement account after 20–30 years of compound growth. Before tapping your Roth IRA, consider these alternatives:
- Low-down-payment mortgages: FHA loans (as low as 3.5% down) and conventional 3%‑down options can help preserve retirement savings. That means you don’t have to borrow as much for your home loan, which in turn means lower monthly payments.
- Down-payment assistance (DPA): First-time home buyers can receive grants ranging from a few thousand dollars up to 3% to 5% of the home’s purchase price, depending on the program or incentive. Start with HUD’s buying a home hub and CFPB’s housing counselor finder to locate programs in your area.
- Homebuyer education benefits: Programs like Fannie Mae HomeReady often require completion of HomeView education. These courses not only improve your readiness but can also unlock special loan terms or assistance.
- Proposed legislation to watch: The First Time Homeowner Savings Plan Act of 2025 is a proposed bill that would increase how much money a first-time home buyer can withdraw from their IRA to use for a down payment. The bill would raise the limit from $10,000 to $25,000, with future increases tied to the rate of inflation. The bill was introduced in the current Congress (119th) on April 8, 2025, but only about 4% of bills become law. Check back with Finhabits for updates on this potential change.
Finhabits Approach: After using your Roth for a home purchase, set up automated weekly contributions through Finhabits to rebuild your retirement savings. Starting with just $20 per week can help you recover the withdrawn amount over time while maintaining your home investment.
Common pitfalls that can cost you thousands
- Exceeding the $10,000 lifetime cap on earnings. This limit applies across all your IRAs combined, not per account. Careful tracking helps avoid unexpected penalties.
- Confusing contributions with earnings. Contributions come out first and are always tax and penalty-free, while earnings require meeting specific conditions for tax-free treatment.
- Missing the Roth IRA 5-year rule deadline. If you take a distribution of Roth IRA earnings before you reach age 59½ and before the account is five years old, the earnings may be subject to taxes and penalties. You may be able to avoid penalties (but not taxes) if you use the withdrawal for a first-time home purchase.
- Exceeding the 120-day window. There is a very important timing rule associated with this exception. The closing must take place within 120 days of the date that the withdrawal is taken from the IRA. If the closing happens after that 120-day window, the full 10% early withdrawal penalty will be assessed.
- Using funds for non-qualified costs. Qualified acquisition costs include down payment, origination fees, discount points, title insurance, home inspection fees, appraisal fees, and more. The bill does not allow for money to be used for moving expenses, furniture, appliances, home improvements after purchase, property taxes, or homeowners insurance.
Source: IRS Publication 590‑B (2025).
Decision support: Is this right for you?
Quick comparison of financing options
| Option | Speed | Upfront Cost | Tax/Penalty Risk | Long‑Term Impact |
|---|---|---|---|---|
| Use Roth contributions only | Fast (5-7 business days) | Low (minimal fees) | None | Moderate; reduces invested balance but avoids earnings penalties |
| Use up to $10k Roth earnings (exception) | Fast (5-7 business days) | Low (minimal fees) | Penalty-free; taxes possible if Roth <5 years | High; significantly reduces tax-free compounding potential |
| FHA/3%‑down conventional | Medium (30-45 days) | Moderate (mortgage insurance required) | N/A | Low; preserves retirement growth potential |
| Down-payment assistance | Slow (45-60+ days) | Low to moderate (application fees) | N/A | Low; preserves retirement with added program requirements |
Key questions to consider before deciding
- Will using your Roth IRA funds significantly improve your debt-to-income ratio and monthly payment?
- Do you have 3–6 months of emergency savings that will remain intact after closing?
- Is your Roth IRA at least 5 years old to minimize potential tax implications?
- Can you commit to rebuilding your Roth quickly through Finhabits’ automated weekly contributions?
- How does your current housing market and interest rate environment affect the urgency of buying now versus waiting?
Growth potential calculator: What you’re giving up
This table illustrates the potential future value of $10,000 if left invested in your Roth IRA rather than withdrawn for a home purchase:
| Years | Conservative Growth (5%) | Moderate Growth (7%) | Aggressive Growth (9%) |
|---|---|---|---|
| 10 | $16,300 | $19,700 | $23,600 |
| 20 | $26,500 | $38,700 | $56,000 |
| 30 | $43,200 | $76,100 | $132,700 |
Note: The hypothetical growth rates shown (5%, 7%, 9%) are for illustrative purposes only and are not intended to predict or guarantee future performance. Actual investment returns will vary based on market conditions.
What’s consistent across all states
| Topic | Federal Rules (Same Nationwide) | What Varies by State/Local |
|---|---|---|
| Roth IRA home purchase rules | $10k lifetime earnings cap, 120-day window, 2‑year first-time test, ordering rules, 5‑year clock | N/A (Roth rules are federal) |
| Down-payment assistance | FHA, VA, and USDA loan standards | Grant/loan amounts, income limits, property price caps, eligibility requirements |
| Homebuyer education | Fannie Mae and Freddie Mac approved courses | Local program-specific requirements and available in-person courses |
Practical timeline: Using a Roth IRA for your first home
- 4-6 months before purchase: Review your Roth IRA statement to confirm contributions vs. earnings and check your 5-year status with Finhabits advisors.
- 2-3 months before closing: Discuss your Roth withdrawal strategy with your lender and closing agent; decide precisely how much (if any) of earnings to use under the exception.
- 3-4 weeks before closing: Submit your IRA distribution request to Finhabits or your current provider, requesting direct wire to escrow if available.
- At closing (within 120 days of withdrawal): Ensure funds are applied to qualified acquisition costs and keep documentation of the transaction.
- If purchase falls through: Contact Finhabits immediately to discuss recontributing funds within the 120-day window to avoid penalties.
- Post-closing (first 30 days): Set up automated weekly contributions through Finhabits to begin rebuilding your Roth IRA balance.
Smart strategies: Getting the most from your Roth IRA
- Withdraw contributions first. Many homebuyers can cover a significant portion of their down payment using contributions alone, avoiding any tax or penalty concerns.
- Coordinate with your spouse. If you’re married, the requirement also applies to your spouse. Your spouse can also make the same $10,000 penalty-free withdrawal. This effectively doubles your potential penalty-free withdrawal amount.
- Help family strategically. You do not have to be the homebuyer. You can qualify for the early withdrawal exemption if you are helping your spouse, child, grandchild, or parent to buy their first house.
- Time the distribution precisely. Request funds 2-3 weeks before closing to ensure receipt while staying well within the 120-day window.
- Rebuild aggressively. You lose “opportunity cost”: Depending on how long you’ve had your Roth IRA, you may lose significant compound interest when you withdraw earnings. Even if you only withdraw contributions, future compound interest will be less. Set up weekly auto-deposits of $20-$150 through Finhabits to restore momentum.
Example scenario (not financial advice): A couple has $35,000 in total Roth contributions and $15,000 in combined earnings across their separate Roth IRAs. They’re planning a $60,000 down payment on a $300,000 home in 2025.
- Use $35,000 of contributions: completely tax and penalty-free.
- Tap $10,000 of earnings ($5,000 each under the exception): penalty-free; potentially tax-free if both Roths are 5+ years old.
- Cover remaining $15,000 with savings or down payment assistance.
- Leave $5,000 of earnings invested to continue compounding.
- Set up $100 weekly auto-deposits through Finhabits to rebuild balances post-closing.
Always verify your specific situation with a tax professional and review IRS Publication 590‑B before proceeding.
Frequently Asked Questions
Is using a Roth IRA for a down payment better than an FHA loan in 2025?
It depends on your complete financial picture. Roth IRA withdrawals provide immediate funds without mortgage insurance but reduce your tax-free retirement growth. With current interest rates and the median home price of $396,900 as of January 2025, FHA’s 3.5% down option preserves retirement funds but includes mortgage insurance costs. Compare your monthly payment, post-closing cash reserves, and long-term growth projections before deciding.
Does the Roth IRA 5-year rule always apply to first-home withdrawals?
Yes, for determining tax treatment on earnings. The first-time homebuyer exception waives the 10% penalty on up to $10,000 of earnings, but those earnings may still be taxable as ordinary income if your Roth is under 5 years old. Your contributions remain tax and penalty-free regardless of the 5-year rule or your age.
Can both spouses use the Roth IRA $10,000 rule for the same home?
Absolutely. Each spouse with their own Roth IRA can withdraw up to $10,000 of earnings penalty-free if both meet the first-time buyer test (no ownership interest in a primary residence during the prior 2 years). This effectively doubles your potential penalty-free withdrawal amount to $20,000 in earnings plus all contributions.
What if I owned an investment property in the last 2 years?
You may still qualify as a first-time homebuyer. The IRS first-time buyer test specifically focuses on principal residence ownership. If you owned only investment or rental property (not your main home) during the past two years, you could still meet the definition. Verify your specific situation with a tax professional.
What counts as “qualified acquisition costs” for the 120-day rule?
Qualified acquisition costs include down payment, origination fees, discount points, title insurance, home inspection fees, appraisal fees, and more. IRA money can also be used for construction costs and land purchases linked to buying or rebuilding a home. The funds must go directly toward purchasing, building, or substantially rebuilding the primary residence.
What happens if my home purchase falls through after taking the distribution?
If your home purchase or construction falls through, you can avoid an early distribution penalty by contributing the amount withdrawn back into your IRA within 120 days of the original distribution. Work with Finhabits advisors immediately to ensure you meet this deadline and properly document the recontribution.
Is there pending legislation to increase the $10,000 limit?
Yes. The First Time Homeowner Savings Plan Act of 2025 is a proposed bill that would increase how much money a first-time home buyer can withdraw from their IRA to use for a down payment. The bill would raise the limit from $10,000 to $25,000, with future increases tied to the rate of inflation. The bill hasn’t passed as of October 2025, but Finhabits will provide updates if this changes.
Can I open or roll over a Roth IRA with Finhabits?
Yes! Finhabits makes it easy to open a new Roth IRA or roll over an existing account with our simplified digital process. Our diversified ETF portfolios are designed for long-term growth while providing liquidity when you need it for milestone purchases like your first home. Start with as little as $100 per week in automatic contributions at finhabits.com.
Key Terms to Know
- Roth IRA first-time homebuyer exception: Special IRS rule allowing up to $10,000 of earnings to be withdrawn penalty-free for a qualifying first home purchase within 120 days.
- Contributions: Money you’ve directly deposited into your Roth IRA; always withdrawable tax and penalty-free regardless of age or timing.
- Earnings: Growth generated by your investments inside the Roth IRA; normally subject to rules for tax and penalty unless exceptions apply.
- 5-year rule: Timing requirement that must be satisfied (5 tax years from first contribution) for Roth earnings to be fully tax-free on qualified distributions.
- Qualified acquisition costs: Eligible expenses including purchase price, closing costs, and customary fees directly related to acquiring a principal residence.
- Lifetime cap: The $10,000 earnings exception limit that applies per person across all IRAs for your entire life, not per transaction.
- Ordering rules: IRS-mandated sequence for Roth withdrawals: contributions first, then conversions, then earnings—determining tax treatment.
- Principal residence: Your main home where you live most of the time—distinct from vacation homes or investment properties.
- 120-day window: Critical timeframe during which withdrawn funds must be used for qualified acquisition costs to avoid penalties.
Your next steps with Finhabits
Using your Roth IRA for your first home can be a smart move when you understand the precise rules—respecting the $10,000 limit on earnings, the 120-day window, and the 5-year clock for tax-free treatment. Start by prioritizing contributions first, maintaining careful documentation, and comparing this option with alternatives like FHA, conventional low-down-payment programs, and local assistance.
Finhabits helps you transform these complex rules into real opportunities with our automated weekly investing, diversified ETF portfolios, and bilingual guidance. Whether you’re just starting to save or ready to make your withdrawal, we provide the tools and support to keep your retirement on track—before, during, and after your home purchase.
When deciding whether to rollover a retirement account, you should carefully consider your personal situation and preferences. This content is educational and does not constitute financial, legal, or tax advice. Always consult with qualified professionals regarding your specific situation.
Sources
- IRS Publication 590‑B (2025) — Distributions from IRAs
- IRS — Roth IRAs overview
- IRS — Topic No. 557, Additional Tax on Early Distributions
- Consumer Financial Protection Bureau — Owning a Home
- Consumer Financial Protection Bureau — Find a Housing Counselor
- HUD — Buying a Home
- Fannie Mae — HomeView
- Fannie Mae — HomeReady Mortgage
- The First Time Homeowner Savings Plan Act of 2025: Explained
