Buying a home is an exciting time in your life, especially if this is your first home purchase. Even with careful planning and many conversations with your mortgage representative about what you can afford, the financial aspects of home ownership can be overwhelming. The strain of closing costs and the down payment may lead you to wonder if your traditional IRA or Roth IRA is a viable option to lessen the burden. The answer is yes.

General IRS Guidelines for IRA Accounts

Individual Retirement Accounts (IRA) are meant for retirement, and the IRS allows tax deductions based on this purpose. To ensure taxpayers don't abuse this special tax treatment, regular plan withdrawals are not permitted until you reach 59 ½ years of age, and early withdrawals receive a 10 percent penalty. IRS Publication 590 does stipulate instances where you can withdraw money without penalty in certain situations. The purchase of your first home is one such circumstance. According to the IRS, you can claim the first-time homebuyer exception as long as you have not owned a home within the previous two years. It does not mean that this home must be the first one you ever owned in your lifetime. So long as you meet this condition, you may withdraw up to $10,000 from your IRA without incurring the 10 percent tax penalty. If you're married and your spouse meets the criteria, then she may also withdraw up to the stated limit, giving you up to $20,000 for your new home down payment. Keep in mind that this is a lifetime maximum, so if you claim the exception more than once, the sum of your withdrawals may not exceed $10,000.

Special Rules for Roth IRA Accounts

Unlike traditional IRAs, Roth IRAs require you to fund the account with already taxed funds. This means the IRS already received their cut of the money upfront, so you may withdraw you contributions at any time, regardless of whether you've crossed the 59 ½ threshold. You will, however, need the $10,000 exception if you require your earnings in addition to contributions. Remember that the IRS exception applies only to the 10 percent penalty, not taxes. Roth IRA earnings withdrawn within the first five years are subject to taxes.

Things to Consider Before Making an IRA Withdrawal

The IRS requires you use the funds within 120 days of withdrawal for home buying purposes, including down payment, finance fees and closing costs. As a general guideline, do not withdraw funds from your IRA account until you schedule your closing. Failure to use the money for a qualified purpose prior to the 120-day expiration will incur the 10 percent tax penalty, as would any early withdrawal. You must file IRS Form 5329 to prove you used the funds for qualified purposes. Also file IRS Form 8606 if making a Roth IRA withdrawal. Don't forget that any funds withdrawn from your IRA will no longer earn potential gains for retirement. Always explore all your options and consider an IRA withdrawal for a down payment to be the last resort.

Source:

IRS Publication 590 (see pg. 55 for exact rules)

Bankrate.com: IRS Rules for IRA Withdrawals

Kiplinger: How to Tap an IRA for a Home Purchase