Can I Use My 401K to Buy a House?

Your 401k provides income after you retire and peace of mind for your future. But that is not the only way your 401k can benefit you. A 401k can be used to purchase a home. There are two ways to leverage those funds to make a home purchase. Learn about the ways to buy a house with your 401k.

401k Withdrawal

Technically, you have the ability to withdraw from your 401k before you retire but this will come with some downsides. Anyone under 59 ½ years old or younger than 55 who is still employed is penalized 10% for early withdrawal.

In most circumstances, an early withdrawal is considered a hardship withdrawal; you must present evidence that you are experiencing a financial emergency to get your request approved.

There are some exceptions to this penalty. And guess what? Using the money to purchase a home that will be your main residence is considered an exemption. However, you’ll have a hard time getting the exemption approved if you have other financial assets that you could have used to finance the purchase.

Whether or not the withdrawal is approved, expect the withdrawal amount to be taxed like income. That will change your tax picture come April 15.

No matter how you look at it, this isn’t the ideal way to buy a house. However, if you’re in a bind, it may be your only option.

401k Loan

If buying a house with your 401k seems necessary for your situation, the ideal option is taking out a 401k loan. You won’t be penalized for an early withdrawal and it won’t be taxed as income. This kind of loan doesn’t depend on your credit score, nor does it report to a credit bureau. And, it won’t factor into your debt-to-income ratio.

There are still limits on 401k loans. You can only withdraw a maximum of $50,000 and must pay it back with interest. Typically, interest rates for this loan run 1% to 2% above whatever the current going interest rate is. The time that it takes you to repay this loan will also be time you miss out on contributing to your 401k. Does your employer match any 401k deposits? They won’t be able to match contributions until the loan is repaid because either your contributions will be zero.

If you end up leaving your job or you get laid off before you pay back your loan, your repayment window will shorten. That could make it even more difficult to pay back the loan. If you can’t pay the total amount off by the next tax filing date, your loan is considered a 401k withdrawal, and, thus, you’ll be penalized the 10%.

Again, borrowing against your 401k isn’t an ideal option. However, if you feel confident in the stability of your career and your ability to pay back the loan quickly, it is an option on the table.

Discover Your Loan Options