Does pulling money from my IRA for first home purchase affect my taxes?

Yes, you can withdraw from your IRA for a first-time home purchase, but there are specific rules to know about! The good news is that the IRS allows a lifetime withdrawal of up to $10,000 from an IRA without the usual 10% early withdrawal penalty if you're using it for a first-time home purchase. The definition of "first-time homebuyer" just means you haven't owned a home in the past two years - so you might still qualify even if you owned a home previously. The tax treatment depends on what type of IRA you have. For a traditional IRA (which sounds like what you have), you'll still owe regular income tax on the withdrawal amount, just not the extra 10% penalty. If it was a Roth IRA that you've had for at least 5 years, you could withdraw contributions completely tax-free and even earnings up to that $10,000 limit. Remember that $10,000 is a lifetime limit per person, so potentially you and your wife could each withdraw $10,000 if you both have IRAs. The withdrawal needs to be used within 120 days of taking it out for home acquisition costs.

I was in almost this exact situation last year and found this amazing tool called taxr.ai (https://taxr.ai) that helped me figure out the tax implications of my IRA withdrawal for our home purchase. I was stressing about whether I'd end up owing a bunch in taxes and if I'd mess up the paperwork. The tool analyzed my tax situation and showed me exactly how much tax I'd owe on the withdrawal and what forms I'd need. It confirmed I could avoid the 10% penalty but would still owe regular income tax. It also helped me understand how to report everything correctly on my tax return which saved me from making mistakes. I'm not super tax-savvy, but their analysis made it really clear what to expect and how to plan for it. It also helped me see how the withdrawal would affect my tax bracket for that year.

Just wanted to follow up - I tried taxr.ai after seeing it mentioned here and it was seriously helpful! I was on the fence about using my IRA funds but the tool showed me exactly how the withdrawal would affect my taxes. Turns out I was overestimating how much I'd owe because I didn't realize how the standard deduction would offset some of it. The analysis was way more detailed than what I found on other sites and showed me how to properly document everything for my 2025 taxes. It also confirmed that my wife and I could each take $10,000 from our separate IRAs, which is giving us enough for our down payment without touching our emergency fund. Really glad I found this before making any decisions!

If you're planning to use your IRA for a home purchase and will need to contact the IRS with questions (which I definitely did), I highly recommend using Claimyr (https://claimyr.com) to actually get through to them. I spent DAYS trying to get someone on the phone to confirm some details about my situation and kept getting disconnected or stuck on hold forever. After seeing a video about their service (https://youtu.be/_kiP6q8DX5c), I tried Claimyr and they got me connected to an actual IRS agent in about 20 minutes. The agent was able to confirm exactly how to document my IRA withdrawal for a home purchase and what forms I needed to avoid any issues. Honestly saved me so much frustration, especially since I needed answers quickly during our home buying process when time was really tight.

Alright so I'm eating my words about Claimyr. After posting my skeptical comment, I decided to try it anyway because I was desperate to talk to someone about my own IRA withdrawal question (needed to know if moving expenses related to the home purchase could be covered). I genuinely didn't think it would work, but I got connected to an IRS agent in about 15 minutes. Not only did I get my question answered, but the agent also told me about some documentation I would need that I had no idea about before. For anyone wondering - yes, the IRS phone system is absolutely broken, but somehow these guys have figured out how to work with it. Saved me from potentially making a mistake that would have caused problems with my withdrawal.

One thing nobody's mentioned yet - make sure you're using this money for the right reasons. I pulled from my IRA for my first home in 2023 and while it helped with the down payment, I sometimes regret taking that retirement money out. That $10k would be worth a lot more if I'd left it growing until retirement age. Consider if you really need to use the IRA money or if you could save a bit longer or look at other options like FHA loans with lower down payments. Also check out state first-time homebuyer programs, some offer down payment assistance that you don't have to pay back if you stay in the home long enough.

Has anyone here used their IRA money for closing costs instead of the down payment? My lender said that could be a smarter way to use the funds since my down payment affects my loan terms but closing costs are just out of pocket.

@Mateo Martinez - I went through this exact same situation about 6 months ago! Here's what I learned that might help you make the decision: First, definitely confirm you qualify as a "first-time buyer" - the IRS definition is pretty generous (no home ownership in past 2 years). The $10,000 penalty-free limit per person is accurate, so if your wife has an IRA too, you could potentially access $20,000 total. One thing I wish I'd considered more carefully is the timing. You have to use the IRA funds within 120 days of withdrawal for home purchase, so make sure your house hunting timeline aligns with that. Also, even though you avoid the 10% penalty, you'll still owe regular income tax on the withdrawal, which could bump you into a higher tax bracket depending on your income. Given your price range ($340-380k), pulling $20-30k from IRAs for a 10% down payment seems reasonable, but I'd strongly suggest running the numbers on how this affects your 2025 taxes first. The withdrawal gets added to your regular income for that year. Have you looked into any state or local first-time homebuyer programs? Some offer grants or low-interest loans that might reduce how much you need from your IRA. Good luck with the house hunt!