What a first-time homebuyer savings account does and how it works
A first-time homebuyer savings account is a tax-advantaged savings vehicle that lets you set aside money for a down payment, closing costs, or other home purchase expenses without paying tax on the interest or growth. The account itself is not a government program — it is a product offered by banks, credit unions, and some brokerages. The tax benefit comes from federal law that exempts these accounts from income tax on earnings, as long as you use the money for a may have access to home purchase within a set timeframe.
The most common type is the First-Time Homebuyer Savings Account authorized under Internal Revenue Code Section 408(k)(10), which allows you to withdraw up to $35,000 lifetime from a traditional or Roth IRA without the usual 10% early withdrawal penalty. Some states also offer their own first-time homebuyer savings accounts with different rules and contribution limits. The account you choose depends on which financial institutions in your state offer them and what the contribution and withdrawal rules are.
Money in these accounts typically sits in a savings account, money market account, or certificate of deposit (CD) earning interest. You control when and how much you contribute, and you decide when to withdraw the funds for your home purchase. Unlike down payment information programs that have income limits or require you to meet other conditions, a savings account has no income restrictions — anyone can open one.
Key Takeaways
- First-time homebuyer savings accounts let you save money for a home purchase with tax benefits on the interest you earn.
- The federal IRA withdrawal option allows you to take out up to $35,000 from a traditional or Roth IRA penalty-free if you have never owned a home.
- State-specific accounts vary widely in contribution limits, account types, and income thresholds, so you need to check what your state offers.
- You must use the money within a set timeframe (usually one to three years) or pay taxes and penalties on the earnings.
- These accounts have no income limits, making them available to anyone regardless of how much you earn.
Federal IRA withdrawal option for first-time homebuyers
If you have a traditional or Roth IRA, federal law lets you withdraw up to $35,000 total during your lifetime without the standard 10% early withdrawal penalty. This is a one-time lifetime limit across all your IRAs combined, so if you withdraw $20,000 now, you can only withdraw $15,000 more in the future. The $35,000 limit has been in place since 2024 and applies whether you are married filing jointly or single.
To use this option, you must not have owned a home in the two years before the withdrawal. "First-time homebuyer" in IRS terms means you have not owned a principal residence during that two-year window — it does not mean you have never owned property. You can use the money for your own home purchase, or for a spouse, child, grandchild, or parent's home purchase.
The withdrawal itself is straightforward: contact your IRA custodian (your bank or brokerage) and request a withdrawal for first-time homebuyer purposes. The custodian will process it like any other withdrawal. You will receive a 1099-R form at tax time showing the amount withdrawn. Because it is a may have access to first-time homebuyer withdrawal, you do not report it as taxable income on your tax return, and you do not owe the 10% penalty. However, if you do not use the money for a home purchase within 120 days, you must return it to an IRA or pay income tax and the 10% penalty on the amount.
State-specific first-time homebuyer savings accounts
Several states have created their own savings account programs with different rules from the federal IRA option. These accounts are offered through banks and credit unions in those states and are designed specifically for people saving toward a first home. The details vary significantly by state, so you need to check what your state offers.
California, for example, allows contributions of up to $20,000 per year (or $40,000 if married filing jointly) to a dedicated savings account, and earnings are not taxed if you use the money for a down payment or closing costs within ten years. Illinois caps contributions at $20,000 per year and requires the account to be open for at least one year before withdrawal. New York's program allows up to $10,000 in annual contributions and exempts earnings from state income tax. Some states have income limits that phase out as your earnings rise; others do not.
To find out what your state offers, contact your state housing finance agency or search your state's revenue or taxation department website for "first-time homebuyer savings account." Your bank or credit union may also offer a state-specific product if you live in a state with one. The account process process is usually straightforward — you provide identification, proof of residency, and sometimes proof that you are a first-time homebuyer — and you can open the account in person or online.
How to open an account and make contributions
Opening a first-time homebuyer savings account follows the same steps as opening any savings account. You choose a bank, credit union, or brokerage that offers the product in your state, gather your identification documents, and complete an process. Most institutions let you explore online; some require you to visit a branch.
You will need a government-issued photo ID, proof of your Social Security number (your Social Security card, tax return, or W-2), and proof of your address (a recent utility bill, lease, or mortgage statement). Some institutions also ask for proof that you are a first-time homebuyer, which can be a signed statement or a copy of your tax return showing you have not claimed the homebuyer credit in prior years. Once your account is open, you can deposit money as often as you want, up to the annual or lifetime limit set by your state or the account type.
Contributions are made with after-tax money — you do not get a tax deduction for putting money in. The tax benefit comes from the interest or earnings on the account, which are not taxed as long as you use the money for a may have access to home purchase. If your state account offers a match or credit (some do), that is applied automatically once you meet the contribution threshold.
Withdrawal rules and timelines
The rules for withdrawing money depend on which account you are using. For the federal IRA option, you have 120 days from the withdrawal date to use the money for a home purchase. If you do not use it within that window, you must return the full amount to an IRA within 60 days or face income tax and a 10% penalty on the earnings.
State-specific accounts usually have longer timelines. California allows ten years from the date you open the account; Illinois requires the account to be open for at least one year before you can withdraw. New York does not specify a important date but requires that you use the money for a down payment or closing costs on your primary residence. Check your state's rules before you withdraw, because using the money for something other than a home purchase can trigger taxes and penalties.
To withdraw, contact your financial institution and request a withdrawal for first-time homebuyer purposes. You may need to provide proof of your home purchase — a purchase agreement, closing disclosure, or deed. The institution will process the withdrawal and may send the money directly to your escrow account or title company, or to you. Keep documentation of the withdrawal and how you used the funds in case you are audited.
Tax implications and what happens if you do not use the money
The earnings on your account are tax-free as long as you use the money for a may have access to home purchase. A may have access to purchase typically means buying a primary residence — a home you will live in. Investment properties, vacation homes, and rental properties usually do not count, so check your account agreement before you withdraw.
If you withdraw the money but do not use it for a home purchase, or if you use it for something other than a down payment or closing costs, you owe income tax on the earnings at your ordinary tax rate, plus a 10% penalty (for the IRA option) or state penalties (for state accounts). For example, if you contributed $10,000 and earned $500 in interest, and then you use the money for something else, you owe income tax on the $500 plus the penalty. The $10,000 contribution itself is not taxed because it was made with after-tax money.
If you are married and both spouses have first-time homebuyer accounts, each of you can withdraw up to the limit. If you are buying with a spouse who has owned a home before, you can still use the account as long as you have not owned a home in the past two years. Keep records of your account statements, contributions, and withdrawals for at least three years in case the IRS or your state asks about them.
How first-time homebuyer savings accounts fit with other down payment help
A first-time homebuyer savings account is one tool among several that can help you save for a down payment. It works alongside, not instead of, down payment information programs, grants, or loans offered by your city, county, or nonprofit organizations. You can use a savings account to build your own funds while you are also looking into whether you meet the requirements for other programs.
Some people use a savings account to reach a higher down payment percentage (to avoid mortgage insurance or get a better interest rate), while also using a down payment information program to cover the rest. Others use the account to save for closing costs, which are often not covered by information programs. Because savings accounts have no income limits, they are useful if your income is too high to meet the threshold for other programs.
The main trade-off is time: a savings account requires you to set aside money over months or years, whereas some information programs can provide funds more quickly. If you are buying soon, a savings account may not be the right choice. If you have time to save and want to reduce the amount you borrow, it can be a good fit.
Frequently Asked Questions
Can I use money from a first-time homebuyer savings account to pay off debt before I buy?
No. The money must go directly toward the home purchase — down payment, closing costs, or related expenses like appraisals or inspections. Using it to pay off credit cards or student loans will trigger taxes and penalties. If you need to improve your credit before buying, save separately for that.
What counts as closing costs in a first-time homebuyer savings account?
Closing costs include loan origination fees, title insurance, appraisals, inspections, attorney fees, property taxes, homeowners insurance, and HOA fees due at closing. They do not include moving costs, furniture, or repairs after you own the home. Your closing disclosure will list all costs; use that to verify what you can pay from the account.
Can I open a first-time homebuyer savings account if I am married and my spouse owned a home before?
Yes, as long as you have not owned a home in the past two years. Your spouse's prior ownership does not disqualify you. If you are using the federal IRA option, each of you can withdraw up to $35,000 if you each meet the first-time homebuyer definition.
What happens to my account if I do not buy a home within the timeframe?
For the federal IRA option, the money stays in your IRA and you can use it for retirement. For state accounts, the money usually stays in the account until you withdraw it, but you will owe taxes and penalties on the earnings if you eventually use it for something other than a home purchase. Some state accounts expire after a set period; check your account agreement.
Do I have to report my first-time homebuyer savings account on my taxes?
You do not report contributions or withdrawals used for a home purchase. If you withdraw money and do not use it for a home purchase, you will receive a 1099-R form and must report the earnings as income on your tax return. Keep your account statements and closing documents to show the IRS or your state that the withdrawal was used correctly.