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Buying a home is one of the most significant financial steps most people take, and many wonder if their retirement savings can help bridge the gap. Specifically, a common question is whether you can tap into a Traditional IRA to cover a down payment or closing costs. While you cannot borrow from a Traditional IRA, the IRS does allow first-time homebuyers to make a limited, penalty-free withdrawal that can help.

First-Time Homebuyer Exception

While loans are off the table, the IRS has carved out a special rule for people buying their first home. If you meet the criteria for a first-time homebuyer—meaning you haven’t owned a primary residence in the last two years—you can take out up to $10,000 from your Traditional IRA without incurring the standard 10% early withdrawal penalty.

This exception applies not only to your purchase but also to the purchase of a home for your spouse, children, grandchildren or parents. For married couples, the benefit effectively doubles: each spouse can withdraw $10,000 from their respective IRA, allowing a total of $20,000 toward the purchase.

The Rules You Need to Know

Even with this exception, there are strings attached. The $10,000 limit is a lifetime cap, not something you can use again later. If you use it now, it is gone for good, even if years from now, you technically qualify as a first-time homebuyer again.

The timing matters the most. The funds must be used within 120 days of withdrawal for qualified home acquisition costs, which typically include down payments and closing costs.

Finally, while you can avoid the 10% penalty, the withdrawal is treated as taxable income. Because Traditional IRA contributions are made with pre-tax dollars, pulling out $10,000 will increase your taxable income for the year and can bump you into a higher bracket.

Here’s Why This Move Can Be Costly

Using the retirement savings to buy a home may seem tempting, but doing so comes at a long-term cost. That $10,000 you withdraw today misses out on decades of compound growth. For someone in their 30s, pulling out that money can mean tens of thousands of dollars less by retirement age.

On top of that, $10,000 may not be enough to make a significant impact on your home purchase. In many housing markets, especially competitive ones, the amount may cover only a fraction of the required down payment.

Because of these drawbacks, financial experts often urge people to treat this IRA option as a last resort and not a first choice.

Smarter Alternatives to Consider

Before tapping into retirement savings, it is worth exploring other ways to fund a home purchase. There are Some 401(k) plans which allow the home buyers to borrow against their balance and repay the loan with interest, which avoids taxes and penalties if done correctly. While not perfect, this approach enables you to put the money back into your account.

Government-backed mortgages may also help. FHA loans, for instance, allow down payments as low as 3.5%, while VA loans for veterans and service members often require no down payment at all.

Local and state governments frequently run down payment assistance programs, offering grants or favorable loans for first-time homebuyers. Family members can also contribute gift funds, provided the lender and IRS rules are followed.

Bottom Line

You cannot borrow from a Traditional IRA to buy a home, but first-time buyers can make a one-time, penalty-free withdrawal of up to $10,000. While that can provide some relief, the tax consequences and long-term impacts on retirement savings are serious trade-offs. For many buyers, alternatives like low-down-payment mortgages, assistance programs or 401(k) loans may be better paths.

Before making the decision, it is wise to weigh the short-term benefit of unlocking IRA funds against the long-term setback of reduced retirement growth and to consult a financial advisor about your situation.