How Does the IRS Define a First Home Purchase?
To qualify, it’s important to know how the IRS defines a first-time homebuyer. According to IRS Publication 590-B, a first-time homebuyer is defined in the following way:
Generally, you are a first-time homebuyer if you had no present interest in a main home during the 2-year period ending on the date of acquisition of the home which the distribution is being used to buy, build, or rebuild.
First Home Purchase for Married Couples
The IRS goes on to say that a spouse also has to meet the above definition to qualify. If both spouses meet the above definition, each of you may withdraw up to $10,000 from your respective IRAs. In other words, you could distribute up to $20,000 total from your IRAs to buy, build, or rebuild a home. Elsewhere in the tax code, the IRS refers to a main home as one’s principal residence — the home you live in most of the time during a given tax year. Consequently, this carve-out for a first home purchase won’t work for an investment property or vacation home.
Penalty Waived, Not Taxes, for First Home Purchase
Remember, the only provision here is that there is no 10% early withdrawal penalty. Money withdrawn from a Traditional IRA is still taxable at ordinary income tax rates. There is no getting away from paying taxes on Traditional IRA distributions!
What about a Roth IRA? Roth IRA contributions (not earnings) can always be withdrawn tax- and penalty-free at any time. Additionally, up to $10,000 of Roth IRA earnings may also be withdrawn penalty-free for a first home purchase, provided the account has met the 5-year holding rule. This makes a Roth IRA an even more attractive source of first-home funds than a Traditional IRA.
Up until now, I’ve primarily discussed tapping your Traditional IRA for a first home purchase, but you may have other options. Before disturbing your retirement nest egg, I would exhaust at least two other options first, in no particular order:
1. Take Out a 401(k) Loan
If you or your spouse has a 401(k) through your employer, you may be eligible to loan the money to yourself. While not all 401(k)s have loan provisions, many do. Your HR person can tell you plan provisions for the loan repayment period, the amount you can loan out, and the loan interest rate. Of course, any interest on the loan would be paid to yourself within the 401(k), not to a third party, and rates are reasonable. The main differences between a 401(k) loan and an IRA distribution are that the 401(k) loan is not taxable, you’re “forced” to repay the loan with interest, and you can use the funds for any purpose you choose.
2. Take Out a HELOC
Speak with a qualified mortgage broker about your down payment options. If you have good credit and perhaps some cash you’d like to keep at the bank, you may be eligible for a home equity line of credit (HELOC) on a large portion of your down payment. This loan is in addition to the mortgage. Though borrowing more money may seem daunting, this could be a smart move — it preserves your emergency fund and keeps your retirement nest egg intact for the future.
As of 2026, HELOC rates are significantly higher than first mortgage rates – generally tied to the prime rate, currently in the 7.5%–8.5% range. Be sure to compare the after-tax cost of HELOC interest against the taxes you would owe on an IRA distribution.
As with a 401(k) loan, you won’t owe any taxes with a HELOC. If your mortgage and HELOC combined are under $750,000, the mortgage interest is deductible if you can itemize. One more thing: if your cash, or cash and HELOC combined, make up a down payment of 20% or more, you can avoid the additional cost of private mortgage insurance (PMI).
Plan Ahead When Changing Jobs
Are you planning a job change and you need a down payment? If so, rather than roll your old 401(k) into the new employer’s plan you may want to consider moving it to an IRA simply to make $10,000 of it available for a first home purchase distribution.
You might enjoy some of our other pieces on related topics:
- Your First Home Purchase Part I
- Your First Home Purchase Part II
- The Fifteen Year Mortgage
- Ins and Outs of Traditional IRAs
