As long as you use at least $10,000 of your cash toward a qualified first-home purchase, a $10,000 gross distribution from the IRA, no matter how much of it is withheld for taxes, will qualify for the first-home exception to the early-distribution penalty. For example, if you take a $10,000 distribution and have $2,000 withheld for taxes, as long as you put the remaining $8,000 from the distribution plus another $2,000 of other cash toward the purchase of the home, the entire $10,000 distribution will be free of penalty. If you do not put $2,000 of other cash toward the purchase, resulting in only $8,000 of cash going toward the purchase, the $2,000 not applied to the purchase will be subject to the 10% penalty.
