Using IRA funds toward mortgage

Just because the $8,000 tax credit has come and gone, doesn’t mean you can’t find creative ways to buy your first home. And don’t forget, there are many tax breaks still available.

For starters, look to borrow some of that IRA money you’ve stashed away since starting your first job. It’s one of the few penalty-free options Uncle Sam allows for IRA withdrawal before you’re 59 ½.

You can use up to $10,000 of your IRA funds toward the purchase of a first home. If you’re married and both of you are first-time buyers, you’re eligible for $20,000.

There’s also some fine print regarding the IRS’ definition of a first-time home owner. According to bankrate.com, “you qualify under the tax rules as long as you, or your spouse, didn't own a principal residence at any time during the previous two years.”

But first, how do you accrue the money to withdraw for that first house. Remember, the easiest money to make is the money that’s free from your employer.

Many employers match half of your contributions up to 6 percent, which means if you make $30,000 per year, your total contributions (including 3 percent from the employer) would make $2,700. If you’ve been in your job a few years, you could easily pay for the closing costs, which for a $100,000 home are generally around $4,000. If you make $40,000 per year, you could almost pay for closing costs after working for a year. But I don't recommend draining your entire retirement account after a year, it was just an illustration of how quickly you can accrue funds.

If you decide to use this option, one important tip to remember is the timing of your IRA withdrawal. You must use the IRA funds within 120 days of withdrawal to pay qualified acquisition costs. This includes the costs of buying, building or rebuilding a home, along with any usual settlement, financing or closing costs. Also realize that you must have your Roth IRA open for five years before you withdraw funds for your home purchase.

Buying a home is an important life decision that shouldn't be rushed. Here are some calculators to measure your affordability.

How much house can you afford?

Should you rent or buy?

Here are the other seven ways to avoid the 10 percent early withdrawal penalty.