Can you use an IRA to buy a house? Here's when it makes sense.

Yahoo

11-07-2025

If you're in the market for a home, you may have heard that you can withdraw money from your individual retirement account (IRA) for your down payment. You're absolutely correct — the IRS has even carved out specific rules that allow it under certain conditions.
Before you get excited, this rule has two caveats: It's designed for those who qualify as first-time buyers, and it's a move to approach with caution. Using an IRA for a home purchase comes with multiple pros and cons that could impact your finances for decades to come.
This embedded content is not available in your region.
In this article:
Can you use an IRA to buy a house?
Can I use my Roth IRA to buy a home?
Can I use my traditional IRA to buy a home?
So, should you use your IRA to buy property?
Alternatives to using an IRA for a home purchase
FAQs
The short answer: Yes, you can withdraw money from an IRA to buy a house. Whether it's a traditional or Roth IRA, IRS guidelines allow you to withdraw up to $10,000 from either account type without triggering the 10% early withdrawal penalty. If you're married, both you and your spouse can each withdraw $10,000 from your respective IRAs. You'll avoid penalties, provided you meet certain criteria (more on that below). The rules differ slightly for Roth and traditional IRAs.
With Roth IRAs, you can sidestep both the early withdrawal penalty and income tax. With traditional IRAs, you can avoid the early withdrawal penalty, but you will still face income taxes. Let's get into both IRA types in more detail.
If you have the luxury of choosing which type of IRA to tap, using money from a Roth IRA to fund your home purchase is the better option. Because contributions to Roth IRAs are always made with after-tax dollars, you're allowed to withdraw your contributions (not your earnings) at any time, for any reason, tax- and penalty-free.
If you want to withdraw your earnings without any penalties, you'll need to meet a few criteria. First, you'll need to be making a first-time home purchase. The IRS defines a first-time home buyer as someone who hasn't owned a primary residence within the past two years. If you qualify, you can withdraw up to $10,000 in earnings as long as your account has been open for at least five years.
If your account is less than five years old and you still want to withdraw earnings, you should be able to avoid the early withdrawal penalty — but you may still owe income tax on the earnings portion.
Read more: The best mortgage lenders for first-time home buyers
Yes, you can use your traditional IRA to buy a home, but it comes with a few more strings attached than using funds from a Roth IRA. The withdrawal limits are the same ($10,000 max), but the main difference is that you'll be subject to income tax on the entire amount withdrawn.
Unfortunately, there aren't any tax-free loopholes with traditional IRAs since you make contributions with pre-tax dollars.
While the IRS provisions offer home buyers some pretty generous access to IRA funds for home purchase, experts said it's a move most savers should avoid.
'We view leveraging an IRA for home purchase as a last resort,' said Sam Diarbakerly, Boston-based founder and private wealth advisor at Generation Capital Advisors, in an email interview. Why? Because the long-term costs generally outweigh the short-term rewards.
Withdrawing funds from a Roth IRA to fund a home purchase is generally the most palatable option, but Diarbakerly advised approaching it with caution. 'While a Roth withdrawal [of contributions] won't trigger any penalties or income taxes, you're giving up your most valuable asset: tax-free growth.'
Sure, you can supercharge your IRA savings over the years following a withdrawal to make up the difference, but you're still losing the compounded growth on the money you've withdrawn on top of the money you've taken out. Over time, it adds up.
Say you're 29 years old, have a $30,000 Roth IRA balance, and max out your contributions every year at a modest 6% annual rate of return, your balance at 65 would be over $1.18 million.
If you withdraw $10,000 from that same account at 29, your ending balance at 65 would only be about $1.1 million — assuming you're able to max out your contributions every year. The real cost of $10,000 today is roughly $80,000 tomorrow.
Those considering a withdrawal from a traditional IRA could be in for an unforeseen income tax bump without proper planning.
If you already earn on the high end of your current tax bracket, a $10,000 taxable withdrawal could push you into a higher tax bracket. In this case, not only would you lose out on the long-term growth of the money you withdraw, but you'd also be in a higher tax bracket. Then, every penny you earn for the year would be taxed at that higher rate.
Consulting a licensed tax professional before you tap a traditional IRA can help avoid unpleasant surprises.
Are you using your IRA to fund a home purchase because you think it's your only source of funds? It could be time to reconsider.
'When a client considers tapping retirement funds to make [a home purchase] work, it often signals they may be stretching beyond what's sustainable,' said Diarbakerly.
While every buyer will have their reasons for considering an IRA withdrawal to help with buying a home, it could help to speak with a financial professional for alternative ideas. 'Our job isn't to say no — it's to get creative,' Diarbakerly said. 'We look for smarter, more efficient ways to fund a down payment without giving up the compounding power of tax-free growth.'
Dig deeper: How much house can you afford? Use the Yahoo Finance affordability calculator.
You could have more options for affording your home purchase than you think. In the spirit of the aforementioned 'getting creative,' here are three alternatives to tapping your IRA when buying a home.
If you have a 401(k) with your current employer and your plan allows loans, taking out a loan may offer more perks than tapping your IRA.
'Interest rates on 401(k) loans are comparable to what a home equity line might be, and the borrower is effectively paying themselves back the interest into their 401(k) without worry of a penalty or a limit of $10,000,' said Melissa Barkley, an Alabama-based certified financial planner and wealth advisor with Linscomb Wealth in an email interview.
Many 401(k)s have borrowing limits of 50% of your current account balance or $50,000 — whichever is less.
You'll typically have five years to repay the loan when using a 401(k) loan to buy a home. You'll pay interest, but both the interest and the repaid loan balance are credited to your 401(k). You can still contribute to your 401(k) while you have an outstanding loan, so you can keep your retirement savings on track since you eventually recoup everything you borrowed.
If you're using IRA funds for a down payment because you're struggling to come up with 20% down for a conventional mortgage, Barkley also suggested exploring government-backed mortgages to ease the down payment burden.
FHA loans only have a modest 3.5% down payment requirement. If you're an active-duty military member or a veteran, VA loans offer the option of no down payment.
And remember, you don't need 20% down for a conventional loan. A 20% down payment will let you avoid paying for private mortgage insurance (PMI), but many mortgage lenders accept down payments as low as 3% on conventional mortgages.
If you have a modest income and want help funding your home purchase, you could qualify for a wide array of down payment assistance programs.
These programs come in various shapes and sizes, including grants and low-cost, forgivable loans. You'll usually need to meet income and geography requirements. That is, you'll need to buy a home in a certain area to qualify.
Speak with your mortgage lender and real estate agent to explore potential programs in your area. You can also do a quick web search for programs available where you live.
Read more: Best mortgage lenders for low or no down payments
Avoid loans and selling other assets. If you're struggling to cobble together a down payment or cover closing costs, your IRA might seem like a lifeline. For some first-time buyers, especially those who are younger and lack savings elsewhere, using funds from an IRA can be the quickest path to homeownership.
Skip the early withdrawal penalties. The IRS's exceptions for first-time homebuyers mean you can pull from your IRA without paying the typical 10% penalty, up to $10,000. This makes IRA funds more accessible than many other retirement accounts.
Flexible rules for Roth holders. With a Roth IRA, you can access your contributions at any time, and the five-year rule gives you a path to tap earnings with fewer tax consequences.
Sacrificing future growth. The money you withdraw now won't earn compound interest for retirement later. A small withdrawal today could mean thousands less when you retire.
Taxes on traditional IRA withdrawals. Traditional IRA withdrawals are taxed as ordinary income. This could cause you to be bumped into a higher tax bracket or significantly reduce your expected refund.
Not an ideal solution if you're near retirement. For those close to retirement, dipping into your IRA today could leave you short on funds later when you're on a fixed income.
Yes, in some cases, you can use your IRA to buy a house without penalties. If you qualify as a first-time home buyer, the IRS allows you to withdraw up to $10,000 from a traditional IRA penalty-free, though you'll still owe income tax. With a Roth IRA, you can withdraw contributions at any time without penalty, and earnings may also be penalty-free if the account is at least five years old.
Using your IRA to buy a house can be helpful if you're short on cash, but it's not always the smartest move. You'll lose out on future retirement growth and may face tax consequences. It's best considered a last resort after exploring other options, such as down payment assistance or government-backed mortgages with low down payment requirements.
The IRS allows first-time home buyers to withdraw up to $10,000 from an IRA for a home purchase without the early withdrawal penalty. This is a lifetime limit per person. If both you and your spouse qualify, you can each take out $10,000 from your respective IRAs. Roth IRA contributions can be withdrawn at any time, and up to $10,000 in earnings can also be used if your account is at least five years old.
Laura Grace Tarpley edited this article.