If you are buying a home and are short on cash you may want to consider taking up to $10,000 from your traditional IRA to fund the purchase.

Although the withdrawal is subject to income tax you may qualify for a waiver of the 10% penalty on early distribution if you are deemed to be a first-time home buyer. The law defines a first-time home buyer for this purpose as someone who has never owned a home or has not owned a home in the last two years ending on the date of the purchase. If you are married your spouse must also meet this test.

In addition, the money must be used for the purchase within 120 days of the date of distribution and any amount not used for the purchase of your home within this period will be subject to the 10% penalty. You can avoid the penalty by returning any money not used to your IRA within the 120 day period.

Since you will incur income taxes on the distribution it is recommended that you use your IRA funds as a last resort.