Will I have to pay a penalty tax if I withdraw money from my IRA for a down payment on a house?
Whether you may be subject to a penalty tax depends on a number of factors, such as your age at the time of the withdrawal, how quickly you use the funds, and whether the person acquiring the home is a first-time homebuyer.
Distributions from an IRA before you reach the age of 59½ are generally considered premature distributions (or early withdrawals) by the IRS. To discourage withdrawals taken before retirement age, these premature distributions are subject to the usual federal (and possibly state) income taxes in the year received, and the taxable portion may be subject to a 10% federal tax penalty under Internal Revenue Code Section 72(t) (and possibly a state penalty tax). This 10% tax is referred to as the "premature distribution tax."
Fortunately, not all distributions before age 59½ are subject to this penalty. The IRS does allow some exceptions, including one for the payment of first-time homebuyer expenses.
In order for your withdrawal to qualify for this exception, the funds must be used within 120 days to pay the costs of acquiring the principal residence of a first-time home buyer. A first-time homebuyer (you or your spouse, or the child, grandchild, or ancestor of either you or your spouse) is one who neither owned nor had an ownership interest in another principal residence during the two-year period ending on the day the new home is acquired.
Keep in mind that if you qualify for this exception, it is subject to a $10,000 lifetime limit.