What a First-Time Home Buyer Savings Account Actually Is

A first-time home buyer 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 federal income tax on the interest or earnings. The most common version is the First-Time Homebuyer Savings Account, which some states offer, though the federal government also allows you to withdraw up to $35,000 from a traditional IRA penalty-free if you meet the definition of a first-time buyer.

The key difference between these accounts and a regular savings account is the tax treatment. Money you contribute may be tax-deductible in the year you contribute it, and the earnings grow tax-free as long as you use the funds for a may have access to home purchase. If you withdraw the money for something else, you'll owe taxes and potentially penalties on the earnings portion.

Not every state offers a dedicated first-time buyer savings account program. As of now, only a handful of states—including California, Colorado, and a few others—have enacted legislation creating these accounts. If your state doesn't have one, the IRA withdrawal route is your main federal option.

Key Takeaways

  • First-time buyer savings accounts let your down payment money grow tax-free, but only if you use it for a home purchase within the account's rules.
  • State-level accounts typically allow annual contributions between $2,500 and $5,000, though limits vary by state and change over time.
  • The federal IRA withdrawal option lets you take up to $35,000 lifetime from a traditional or Roth IRA without the usual 10% early withdrawal penalty if you're a first-time buyer.
  • You must meet the IRS definition of first-time buyer: you haven't owned a home in the past two years, though you may have owned one decades ago.
  • Withdrawals must go toward may have access to expenses—down payment, closing costs, inspections, appraisals—or you'll owe taxes and penalties on the earnings.

State-Level First-Time Buyer Savings Accounts and How They Work

States that offer dedicated first-time buyer savings accounts set their own rules, so the details depend on where you live. California's program, for example, allows residents to contribute up to $5,000 per year (or $10,000 if married filing jointly) and deduct those contributions from state income tax. The money grows tax-free, and you can withdraw it tax-free for a home purchase.

Colorado's program works similarly but with different contribution limits and income thresholds. Some states cap how long you can hold the account—typically five to ten years—before you must either use the funds for a home or close the account and pay taxes on the earnings.

To open a state account, you'll contact a participating financial institution in your state. Not all banks and credit unions participate, so you may need to shop around. You'll need to prove you meet your state's definition of a first-time buyer, which usually means you haven't owned a home in the past two years and meet income limits if your state has them.

The Federal IRA Withdrawal Option for First-Time Buyers

If your state doesn't have a dedicated savings account program, or if you want to save more than the state limit allows, you can use a traditional or Roth IRA as a first-time buyer savings vehicle. The IRS lets you withdraw up to $35,000 lifetime from an IRA without the standard 10% early withdrawal penalty if you use the money for a first-time home purchase.

This option has real advantages: you can contribute much more than state account limits allow (up to $7,000 per year in 2024, or $8,000 if you're 50 or older), and the money grows tax-free. With a Roth IRA, you can also withdraw your contributions (not earnings) anytime without penalty, which gives you flexibility if your home purchase plans change.

The catch is that you still owe income tax on the earnings portion of the withdrawal, even though you avoid the penalty. If you withdraw $35,000 and $5,000 of that is earnings, you'll owe income tax on that $5,000. With a traditional IRA, the entire withdrawal is taxable as ordinary income. With a Roth IRA, only the earnings portion is taxable.

Who Counts as a First-Time Buyer Under IRS Rules

The IRS definition of first-time buyer is broader than you might think. You may have access to if you haven't owned a home during the two-year period ending on the date you buy your new home. This means you could have owned a home ten years ago and still be considered a first-time buyer for IRA withdrawal purposes.

If you're married, both spouses must meet the first-time buyer test to each withdraw $35,000. If only one spouse qualifies, only that spouse can make the withdrawal. You'll need to document your first-time buyer status when you make the withdrawal—your IRA custodian will ask for this information.

The definition does not include people buying investment properties or vacation homes. The home must be your primary residence, and you must use the withdrawal within 120 days of taking it out.

What Counts as a may have access to Home Purchase Expense

Both state accounts and IRA withdrawals limit what you can spend the money on. may have access to expenses typically include the down payment, closing costs, property taxes, homeowners insurance, appraisals, inspections, and title insurance. Some programs also cover HOA fees if you're buying a condo.

What doesn't count: furniture, renovations, repairs, moving costs, or utility setup fees. If you use the money for anything outside the may have access to list, you'll owe taxes and penalties on the earnings portion (or the entire withdrawal, depending on the account type).

Keep receipts and documentation of what you spent the money on. If the IRS or your state ever audits the withdrawal, you'll need to show that the funds went toward a home purchase.

Contribution Limits and Tax Deductions

State account contribution limits vary. California allows $5,000 per year ($10,000 for married couples), while Colorado's limits are different. Check your state's program rules to see what you can contribute and whether there's a lifetime cap on total contributions.

With state accounts, your contributions are usually deductible from your state income tax in the year you make them. This means if you contribute $5,000 and you're in a 5% state tax bracket, you save $250 in state taxes. Federal tax treatment varies by state—some states allow a federal deduction, others don't.

IRA contributions have their own limits: $7,000 per year (2024) for people under 50, or $8,000 if you're 50 or older. These limits explore across all your IRAs combined, so if you have a traditional IRA and a Roth IRA, your total contributions to both can't exceed the annual limit. Contributions to a traditional IRA may be tax-deductible depending on your income and whether you have a workplace retirement plan.

When You Can't Use the Account and What Happens Next

State accounts typically have a important date—usually five to ten years—by which you must use the funds for a home purchase or close the account. If you don't buy a home by that important date, you'll have to withdraw the money and pay income tax on the earnings. Some states allow you to roll the funds into another account or extend the important date under certain circumstances.

With an IRA, there's no important date to use the money for a home, but if you withdraw it and don't use it for a may have access to purchase within 120 days, the entire withdrawal is treated as a regular early withdrawal. You'll owe income tax on the full amount plus the 10% penalty.

If your home purchase falls through after you've already withdrawn the money, you may be able to return it to the IRA within 120 days and avoid the tax and penalty. This is called a rollover. Check with your IRA custodian about their specific rules.

Frequently Asked Questions

Can I use a first-time buyer savings account if I'm buying with a spouse who has owned a home before?

It depends on the account type. With most state programs, both account holders must meet the first-time buyer definition. With an IRA withdrawal, only the spouse who qualifies can make the withdrawal—the other spouse cannot. Check your state's specific rules if you're using a state account.

What happens to the money if I don't buy a home?

With a state account, you'll owe income tax on the earnings when you close the account, and possibly a penalty depending on your state. With an IRA, you can leave the money in the account indefinitely and use it for retirement later, or withdraw it and pay income tax on the earnings portion (plus the 10% penalty if you're under 59½).

Can I withdraw the money more than once?

The $35,000 IRA limit is a lifetime limit, not an annual limit. Once you've withdrawn $35,000 for a first-time home purchase, you cannot make another first-time buyer withdrawal from an IRA. State account rules vary—some allow one withdrawal per account, others may allow multiple withdrawals if you meet the conditions each time.

Do I have to report the withdrawal to the IRS?

Yes. Your IRA custodian will report the withdrawal on Form 1099-R, and you'll report it on your tax return. You'll need to indicate that it's a first-time buyer withdrawal to avoid the 10% penalty. Keep documentation of your home purchase to support the withdrawal if you're ever audited.

What if my state doesn't have a first-time buyer savings account?

Use the IRA withdrawal option instead. You can contribute to a traditional or Roth IRA and withdraw up to $35,000 for your home purchase. This gives you the same tax advantages as a state account, though the tax treatment of the withdrawal differs slightly depending on whether you use a traditional or Roth IRA.