Whether you’re planning to buy your first home or moving, finding the money to take care of the upfront costs can be difficult. In a perfect world, we’d all be able to plan ahead and have the proper funds needed for a down payment or to cover closing costs, but unfortunately, for many people, this is not the case.

If you need the money to help buy a house, consider using your IRA. Believe it or not, it’s possible to take funds from a self-directed IRA to purchase a home without suffering the 10% penalty. If you’re curious about how you can use your IRA to help you buy a house, here are the topmost frequently asked questions.

1. Am I Going To Pay A Penalty If I Use My IRA?

Usually, people hesitate to take funds from their IRA because they are smacked with a 10% penalty. After setting all that money aside, the last thing anyone wants is to suffer that early withdrawal fee. However, what many don’t know is that there are certain situations that avoid this tax penalty.

As part of the 1997 Taxpayer Relief Act, traditional or Roth IRA owners can receive distributions from their account without taking the penalty for certain situations. One of these situations is buying a home for the first time. The penalty is waved, but you will still have to pay taxes if applicable on the traditional IRA.

2. How Much Am I Allowed To Take Before The Penalty?

Single-party account holders receive a lifetime contribution of up to $10,000 dollars to purchase their new home. If you are married, you can pull contributions from both retirement accounts. You could potentially have $20,000 of residential cash without having to pay any penalty. Of course, you can’t just take the money. Your distribution needs to be approved as a “qualified distribution.”

3. Do I Have To Wait Until Retirement To Take Money From My Account?

No. If you are buying a home for the first time, among other exceptions, you can take money from your IRA to cover costs. These additional situations include covering medical expenses, furthering education, unexpected job loss, disability, or active duty in the military.

4. Do I Have To Be The Buyer?

No. Others in your family can take advantage of the “first-time homebuyer” arrangement. The IRS says the first-time home buyer using the funds can be you, your spouse, a child, grandchild, or parent.

5. Is There A Time Limit?

Once you’ve removed the funds from your IRA, you need to use them within 120 days. Carefully plan when you withdraw these funds. You should take only what you need for buying, building, rebuilding, or closing costs. These are considered “qualifying distributions.” So, before taking these funds, be sure to plan how you want to use the distribution first. Keep in mind, these funds can only be used on the home-buying process, not for furnishing, general repairs, or daily maintenance.

6. Is There A Difference Between A Roth IRA And A Traditional IRA?

Yes. While both will allow you to take funds, you must have your account for five years in the case of a Roth IRA. If you haven’t, you will be subjected to taxation. Additionally, the amount of taxes you will have to pay on your distributions will depend on the type of IRA you own. However, if you do wait the five years, your Roth IRA contributions could be tax-free! With traditional IRAs, however, you will have to pay the typical income tax.

7. Can I Take This Distribution More Than Once?

That depends on how much you take out. Keep in mind that you cannot use this distribution every time you need to buy a home. You can’t just pull out $10,000 from your IRA every time someone in the family needs to purchase a home. The $10,000 is a lifetime limit of total withdrawals that you can use penalty-free. Once you’ve taken that full amount, you cannot take any more. It would be wise to spread out those funds over time.

8. Do I Have To Be A First-Time Homebuyer?

Not necessarily. The IRS ruled that not only can first-time home buyers use this relief fund, but also those who have not owned a home for two years. As long as you have not owned a home during the two-year period before purchasing a home, you can successfully utilize the Relief Act. As stated before, you can also use this fund to help others purchase their first home.

9. What If I Don’t Qualify?

With a Roth IRA, you can still withdraw funds. You’ve already paid the taxes on them, so you won’t incur any penalties. You can move that money without tax – but not the interest. You can easily take from the funds you put in, but you cannot take the interest without penalty. If you own a traditional IRA, you will accrue penalty if you take funds.

Investing In Your Future

Thanks to the 1997 Taxpayer Relief Act, first-time homebuyers can use their IRA funds to purchase their dream home. Of course, perform your due diligence before taking any major distributions from your traditional or Roth IRA. Consult with a trusted financial advisor today and discover how you can purchase a new home using your IRA.