What a first-time home buyer savings account actually does
A first-time home buyer savings account is a dedicated savings vehicle that lets you set money aside for a down payment while receiving tax benefits you would not get from a regular savings account. The account itself works like any other savings account — you deposit money, it earns interest, you can withdraw it — but the tax treatment is different. Depending on which type you choose, you may be able to deduct contributions from your taxable income, or withdraw earnings tax-free when you use the money to buy your first home.
The two main options are a First-Time Homebuyer Savings Account (available in some states) and a Roth IRA (available everywhere). A few states also offer Individual Development Accounts (IDAs) that match your savings dollar-for-dollar up to a limit. Which one makes sense depends on your income, how much you can save, and whether you have other retirement savings already.
The catch: you have to actually use the money for a home purchase to get the tax benefit. If you withdraw it for something else, you may owe taxes and penalties. The rules about what counts as a "first-time buyer" and what counts as a "first home" vary by account type and sometimes by state.
Key Takeaways
- A First-Time Homebuyer Savings Account lets you deduct contributions from your taxes in states that offer it, but availability and rules vary by state.
- A Roth IRA is available everywhere and lets you withdraw up to $35,000 of contributions and earnings tax-free for a first home purchase, but you can only contribute $7,000 per year (as of 2024).
- Individual Development Accounts in some states match your savings contributions, effectively doubling your money up to a set limit.
- You must use the money for a home purchase to avoid taxes and penalties; withdrawing it for other reasons triggers tax bills and possible early-withdrawal penalties.
- Opening any of these accounts takes 15 to 30 minutes online or in person at a bank, credit union, or brokerage.
State-offered First-Time Homebuyer Savings Accounts
Several states have created their own first-time homebuyer savings accounts with tax deductions built in. California, Connecticut, Maryland, and a handful of others offer these programs, but the rules and contribution limits differ by state. In California, for example, you can deduct up to $20,000 per year in contributions ($40,000 if married filing jointly), and the money grows tax-free as long as you use it for a down payment or closing costs within a set timeframe.
To open one, you first check whether your state offers the program — your state's revenue or taxation department website will list it. If it does, you then open the account through a participating bank or credit union (the state publishes the list). The process is straightforward: you provide your name, Social Security number, address, and income information. The bank verifies you have not owned a home in the past two years (or whatever your state's definition of "first-time buyer" is) and opens the account. You can usually do this online in 15 to 20 minutes.
The money you deposit is yours to withdraw anytime, but if you withdraw it for anything other than a home purchase, you lose the tax deduction and may owe penalties. Most states require you to use the money within five to ten years of opening the account.
Using a Roth IRA for a first home down payment
A Roth IRA is a retirement account, but the rules allow you to withdraw up to $35,000 of contributions and earnings tax-free for a first home purchase — a one-time exception to the normal early-withdrawal penalty. This makes it useful for down payment saving even though it is technically a retirement account. You can open a Roth IRA at any bank, credit union, or brokerage (Fidelity, Vanguard, Charles Schwab, your local credit union, etc.).
The annual contribution limit is $7,000 per person as of 2024 (or $8,000 if you are 50 or older). That means if you open a Roth IRA today, you can put in $7,000 this year, $7,000 next year, and so on. If you are married, your spouse can open their own Roth IRA and contribute $7,000 per year as well, giving you $14,000 per year combined. The money grows tax-free, and when you buy your first home, you can withdraw up to $35,000 without owing taxes or penalties.
The catch: you must have earned income to contribute (you cannot contribute money from investments or gifts), and the $35,000 limit is per person, not per account. If you are married and both have Roth IRAs, you can each withdraw $35,000, for $70,000 total. You also have to use the money within 120 days of withdrawal, and it has to go toward buying, building, or rebuilding your first home.
Individual Development Accounts in states that offer them
An Individual Development Account (IDA) is a matched savings account offered through nonprofits and some government agencies in certain states and cities. You deposit money, and the program matches it — often dollar-for-dollar up to a limit, sometimes at a higher ratio. If your state or city runs an IDA program for homebuyers, this is the fastest way to grow a down payment fund because the match is information programs.
To learn about your area has an IDA program, search "[your city or county] Individual Development Account homebuyer" or contact your local housing authority or community action agency. If one exists, you will explore through that organization, not a bank. The process asks about your income, savings history, and homeownership goals. Some programs require you to complete a financial literacy course (usually online, a few hours long) before you can start saving.
Once you are enrolled, you open a savings account (usually at a partner bank or credit union) and deposit money. The program tracks your deposits and adds the match. If the program matches dollar-for-dollar and you deposit $5,000, you now have $10,000. The match is typically capped — you might be able to earn a maximum match of $2,000 or $3,000 — so the program limits how much you can save before the match stops. You must use the money for a down payment or closing costs, and you usually have a set timeframe (often two to five years) to complete the purchase.
How to open the account: step-by-step
The process differs slightly depending on which type of account you choose, but the basic steps are the same. First, decide which account type fits your situation: if your state offers a homebuyer savings account and your income qualifies, start there. If not, or if you want to save more than your state allows, open a Roth IRA. If your area has an IDA program, check whether you meet the income limits — IDAs often target lower-income savers.
For a state homebuyer savings account or Roth IRA, go to your bank, credit union, or brokerage website and search for "first-time homebuyer savings account" or "Roth IRA." Click the link to open an account. You will be asked for your name, date of birth, Social Security number, address, and employment information. You may also need to confirm that you have not owned a home in the past two years (or whatever your state's definition is). The whole process takes 15 to 30 minutes online. Once approved, you can link a bank account and make your first deposit when ready.
For an IDA, contact the nonprofit or agency running the program in your area. They will send you an process form (online or paper) and explain the enrollment process. This usually takes a few days longer because the organization has to verify your income and sometimes require the financial literacy course before you can open the account.
What happens to the money if you do not buy a home
If you withdraw the money for anything other than a home purchase, the tax benefits disappear and you may owe penalties. With a state homebuyer savings account, you lose the tax deduction on your contributions and may owe a penalty (usually 10 percent of the withdrawal). With a Roth IRA, you owe income tax on the earnings portion of the withdrawal, plus a 10 percent early-withdrawal penalty. With an IDA, you typically have to return the match money to the program, though you keep your own contributions.
The definition of "home purchase" is strict. You cannot use the money for renovations, repairs, or improvements to a home you already own. You cannot use it to pay off a mortgage. It has to go toward buying a new home or, in some cases, building or rebuilding one. If you are unsure whether your planned use qualifies, ask the account provider before you withdraw.
Comparing the three account types
| Account Type | Where to Open | Annual Contribution Limit | Tax Benefit | Availability |
|---|---|---|---|---|
| State Homebuyer Savings Account | Participating bank or credit union in your state | Varies by state (often $20,000–$40,000) | Deduct contributions from taxable income | California, Connecticut, Maryland, and a few others |
| Roth IRA | Any bank, credit union, or brokerage | $7,000 per person ($8,000 if 50+) | Withdraw up to $35,000 tax-free for first home | Everywhere |
| Individual Development Account | Nonprofit or government agency in your area | Varies; match is capped | Program matches your deposits (often dollar-for-dollar) | Select cities and states |
Frequently Asked Questions
Do I have to use a special account, or can I just save in a regular savings account?
You can save in a regular account, but you will miss out on tax benefits. A regular savings account earns a small amount of interest, and you pay taxes on that interest. A first-time homebuyer account or Roth IRA lets you avoid taxes on the growth, which adds up over time. If you are saving $5,000 a year for five years, the tax savings can be hundreds of dollars.
What if I am married — can we both open accounts?
Yes. If you are married, you and your spouse can each open your own account (whether it is a state homebuyer account or a Roth IRA). You each contribute separately and each get the tax benefit. With a Roth IRA, you can each contribute $7,000 per year, giving you $14,000 combined. With a state homebuyer account, the limits are usually per person as well.
Can I withdraw money from my Roth IRA for something other than a home if I need it?
You can withdraw your own contributions anytime without penalty. You cannot withdraw earnings without owing taxes and a 10 percent penalty unless you meet specific exceptions (age 59½, disability, or a first home purchase). If you withdraw earnings for a first home, you avoid the penalty but only if you use the money within 120 days and it goes toward the home purchase.
What counts as a first-time homebuyer?
Most programs define it as someone who has not owned a home in the past two years. Some are stricter and require you to have never owned a home. A few allow you to may have access to if you are a single parent or if your spouse owned a home but you did not. Check your specific program's definition before you open the account.
Can I open multiple accounts to save more money?
You can open a state homebuyer account and a Roth IRA at the same time — they are separate programs with separate limits. You cannot open two Roth IRAs to double your contribution limit; the IRS tracks your total Roth contributions across all accounts. You can open multiple IDAs only if different programs in different areas offer them, which is rare.