Can I Use My 401K to Buy a House?

Your 401(k) provides peace of mind after you retire as a source of income to cover all your living expenses. But that is not the only way your 401(k) can benefit you. One way to use your 401(k) now is to buy a home. There are two ways to leverage those retirement savings to purchase a home. If you’re stuck saving for a down payment but are tired of waiting, this option could be your solution. Learn about the ways to buy a house with your 401(k).

What is the 401(k) Plan

A 401(k) is a retirement savings plan some employers offer as an employee benefit. The account allows employees to directly contribute a portion of their pre-tax income into an investment account. These contributions grow tax-deferred, meaning you don’t owe income taxes on the funds until you withdraw the money, typically during retirement. Employers often match a percentage of employee contributions, providing an additional boost to savings. The funds in a 401(k) are typically invested in a mix of stocks, bonds, and mutual funds, which you can select based on your risk tolerance and retirement goals.

This plan helps employees save consistently and take advantage of compound interest over time, building a financial cushion for retirement. The intent is not to withdraw money until you reach retirement age or 59 1/2 years old.

The Internal Revenue Service (IRS) sets rules and regulations for 401(k) plans, including the amount you can contribute each year, the types of investments you can make, and the penalties for early withdrawal. 

There are two types of 401(k) plans: a traditional and a Roth 401(k). The differences matter for a few reasons in your retirement planning and hopes to access funds to buy a home. A traditional 401(k) allows you to deduct your contributions from taxable income, thereby lowering your annual income tax payment. You’ll pay taxes later when you start withdrawing from the retirement savings. 

A Roth 401(k) contributes money after you pay income taxes, so you won’t owe income taxes later in retirement. You can also withdraw contributions before age 59 1/2 without paying taxes or being penalized. However, you can’t draw from any earned income just yet. 

401(k) Withdrawal for Retirement Savings

Technically, you can withdraw from your 401(k) before you retire, but this will come with some downsides. 

In most circumstances, an early withdrawal is considered a hardship withdrawal. However, you must present evidence that you are experiencing financial hardship to get your request to withdraw money approved. Additionally, any withdrawn amount will be subject, which can significantly affect the net amount you receive during retirement to income taxes.

Anyone under 59 ½ years old or younger than 55 still employed is penalized 10% for early withdrawal. However, there are some exceptions to this early withdrawal penalty. And guess what? Using the money to purchase a home that will be your primary residence is an exemption under IRS regulations. 

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

No matter how you look at it, this isn’t the ideal way to buy a house. You’ll have difficulty getting the exemption approved if you have other financial assets that you could have used to finance the purchase. However, it may be your only option if you’re in a bind.

Understanding 401(k) Options for Home Buying

When considering using your 401(k) for a home purchase, it’s essential to understand the rules and regulations surrounding these retirement accounts. The funds in a 401(k) account are intended for retirement, but some exceptions allow you to use the money for a home purchase.

The best use of a 401(k) towards buying a home would be to cover escrow costs, closing costs, the minimum down payment, or an amount that enables the borrower to not owe private mortgage insurance (PMI) on a home loan.

401(k) Loan to Pay For a Home

If buying a house with your 401(k) seems necessary for your situation, the ideal option is taking out a 401(k) loan. You avoid paying early withdrawal penalties, and the amount won’t be taxed as income. Essentially, you are borrowing money from yourself.

This kind of loan doesn’t depend on your credit score, nor does it report the loan to a credit bureau. And, it won’t factor into your debt-to-income ratio if you apply for a different loan program down the round. 

There are limits on 401(k) loans. The maximum loan amount is the lesser of:

• $50,000 

• $10,000 or half the vested account balance. 

Whatever amount is borrowed must be paid 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 401(k). The repayments are not considered contributions, so they’re not eligible for earning interest. But if you’re already set up for payroll deductions, you can set up that amount to automatically repay the loan. 

Does your employer match any 401(k) deposits? They won’t be able to match contributions until the loan is repaid because your contributions will be zero. For that reason, a 401(k) loan can have long-term financial implications, including penalties and taxes.

If you leave your job or get laid off before you pay back your loan, your repayment window will shorten. That could make it even more challenging to pay back the loan. If you can’t pay the total amount off by the next tax filing date, the IRS considers the loan a 401(k) withdrawal, and, thus, you’ll be penalized the 10%.

401(k) Withdrawal

Instead of taking out a loan, you can withdraw money from the account outright. Depending on your setup–traditional or Roth–and your age, there are potential tax consequences. You may pay income taxes if it’s a traditional 401(k).

Home purchases for primary residences do qualify as a hardship withdrawal. But, if you have other assets that could have been used for the home payment, you don’t qualify. That means if you had a life insurance policy or other retirement nest eggs, those must be used first.

The amount removed can include money to cover the potential 10% penalty and income taxes. Purchases for a second home incur this penalty and income taxes. Any withdrawals are done as a lump sum. But the good news is you won’t pay interest on a withdrawal like a loan.

Taking money early has potential financial implications for your lifetime earnings. However, unlike a loan, you can immediately begin making contributions that count for any employer matches and for earning income.

Downsides to 401(k) Borrowing

While using your 401(k) for a home purchase may seem convenient, it can significantly impact your retirement savings. Those not of retirement age face early withdrawal fees that add to what’s already a high expense. Your account type may leave you on the hook to pay income taxes. 

Additionally, the terms of your 401(k) plan may not allow for loans or withdrawals for home purchases. Review the specific plan and speak with a financial advisor about what is allowed.

With limited withdrawal amounts, the funds you take from the retirement account may still not be enough for the down payment you want to gain the best mortgage terms.

And you’ll be missing out on the tax advantages of 401(k) accounts, employer matches, and years of accumulating investment earnings. It reduces the retirement funds you’ll have available in your golden years.

Again, borrowing against your 401(k) 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.

Alternatives to Using Your 401(k)

While using your 401(k) for a home purchase may seem like a convenient option, there are alternative solutions you can consider. Here are a few:

• Down payment assistance programs: Many government agencies and non-profit organizations offer down payment assistance programs that can help you cover home purchase costs. These programs may offer grants, loans, or other assistance to help you achieve homeownership.

• Mortgage options: You may qualify for a mortgage with a lower down payment requirement, such as a Federal Housing Administration (FHA) loan or a Department of Veteran Affairs (VA) loan. These loans often have more lenient credit score requirements and lower down payment options. Some have flexible credit criteria that help you qualify.

• Personal savings: You can also consider using your personal savings or other sources of funding to cover the costs of a home purchase. This may require some time and discipline to save up enough money, but it can be a more cost-effective option in the long run.

• Individual Retirement Accounts: Roth IRAs allow you to withdraw any contributions tax and penalty-fee. Whatever you take out must be less than or equal to the what you have put in, regardless of age or date of account opening. They also have special provisions just for first time homebuyers to access funds up to $10,000.

• Home equity loans: If you already own a home, applying for a home equity loan or line of credit may give you access to down. payment funds you need without waiting on your current home to sell or touching retirement funds.

Discover Your 401(k) Options for Home Purchases

Borrowing money always comes with a cost, whether it’s from retirement funds or a private lender. Make sure you’ve explored all your mortgage options and talked to a local lender in your market. Using a 401(k) to buy a home comes with far-reaching tax implications. Besides speaking with a loan officer, talk with your financial or retirement advisor about how doing so impacts your retirement planning. Plus, they can help brainstorm financing solutions you may not have considered.

Updated January 2025