Table of Contents
- Can You Use a 401(k) to Buy a House?
- How a 401(k) Loan Works
- How a 401(k) Hardship Withdrawal Works
- Pros and Cons of Using a 401(k) to Buy a House
- What Are the Rules & Penalties for Using 401(k) Funds to Buy a House?
- What Are the Alternatives to Using a 401(k) to Buy a House?
- How Using a 401(k) for a Home Purchase Affects Retirement Savings
- FAQ
There are two options if you want to use your 401(k) to buy a house and not incur a penalty: a 401(k) loan or a hardship withdrawal. These options come with many rules and restrictions — and given the potential risk to your retirement savings, it’s wise to consider some alternatives.
Among the requirements: If you borrow money from your 401(k) to buy a primary residence, you’d have to pay back that loan with interest. If you take what’s known as a hardship withdrawal for a down payment on your principal residence, you have to meet the strict IRS criteria for “immediate and heavy financial need” for doing so.
You won’t owe tax on a 401(k) loan, but it generally must be repaid within five years. A hardship withdrawal (if you qualify) still requires that you pay income tax on the withdrawal. In addition, every workplace plan is different and may have different rules.
Before you consider using your 401k to buy a home, which could permanently reduce your retirement savings, explore alternatives like withdrawing funds from a traditional or Roth IRA, seeking help from a Down Payment Assistance Program (DAP), or seeing if you qualify for other types of home loans.
Key Points
• Many 401(k) plans allow employees to withdraw funds, but an early withdrawal, i.e., before age 59 ½ , comes with a 10% penalty (on top of income tax).
• If your plan allows it, you may avoid the 10% penalty by taking a 401(k) loan or a hardship withdrawal (assuming you meet strict IRS requirements).
• You don’t have to repay a hardship withdrawal, but you will owe income tax on the amount you withdraw.
• Taking out a 401(k) loan may be easier than borrowing from a bank, but the loan typically must be repaid within five years, or you could owe tax and a penalty.
• Before using your 401(k) to help buy a house, consider the serious impact it might have on your retirement savings.
Can You Use a 401(k) to Buy a House?
A 401(k) is generally a type of employer-sponsored retirement plan, which you may be able to manage through the plan sponsor’s website (similar to investing online).
If your employer plan allows it, you can use your 401(k) to help buy a house, and it won’t be seen as an early 401(k) withdrawal with a 10% penalty. Here’s what you need to know.
2 Ways to Use Your 401(k) to Buy a House
There are only two ways you can use a 401(k) to buy a house, penalty free. Note that the following rules generally apply to other employer-sponsored plans as well, like a 403(b) or 457(b). But all retirement plans have different rules, so be sure to check the terms.
• 401(k) loan. If your plan allows you to borrow from your 401(k) to buy a house, you’ll avoid the 10% early withdrawal penalty, and you won’t owe tax on the loan. But you must repay the loan to yourself, plus interest.
• Hardship withdrawal. If you’re under 59 ½, you may be able to take out a hardship withdrawal without incurring a 10% penalty, but only if you meet specific IRS requirements for “an immediate and heavy financial need.”
There are several conditions that qualify as a hardship, one of them is for the purchase of a primary residence, but not a second home.
You’ll owe income tax on a hardship withdrawal, regardless of the circumstances.
How Much of Your 401(k) Can Be Used for a Home Purchase?
The amount you can take out of a 401(k) depends on the method you use.
• 401(k) loan. You can generally borrow up to 50% of your vested balance, up to $50,000, whichever amount is less. If 50% of your vested balance is less than $10,000, you may be able to borrow up to $10,000.
Note that after you open an IRA, the rules for taking a withdrawal from these individual retirement accounts are different. You cannot take a loan from an IRA, for example. But you may be able to take an early withdrawal for a first-time home purchase, which is discussed below.
• Hardship withdrawal. The limits on hardship withdrawals can be determined by your specific plan, but these withdrawals are generally limited to the amount needed to cover the financial hardship in question, plus the necessary taxes.
Depending on plan rules, a hardship withdrawal may include your elective contributions (savings) as well as earnings on those deposits. But in some cases you’re not allowed to withdraw earnings.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
How a 401(k) Loan Works
It’s possible to take a loan from an existing 401(k), and in some ways this option may seem easier. Chiefly, borrowing from a 401(k) doesn’t come with the same level of credit scrutiny as taking out a conventional bank loan, and interest rates can be favorable as well.
Your employer generally sets the rules for 401(k) loans, but you typically must pay back the loan, with interest, within five years. If a person leaves their job before the loan is repaid, the balance owed could be deducted from the remainder of their 401(k) funds.
You don’t owe any income tax on a 401(k) loan. But you pay yourself interest to help offset the loss of investment growth, since the funds are no longer invested in the market. (Although having a 401(k) is different than a self-directed brokerage account, because it’s typically tax deferred, you do invest your savings in different investment options.)
You can take out a 401(k) loan for a few different reasons (e.g., qualified educational expenses, medical expenses), depending on your plan’s policies. Those using a loan to purchase a residence may have more than five years to pay back the loan.
How a 401(k) Hardship Withdrawal Works
While it’s possible to withdraw funds from your 401(k) and most other employer-sponsored plans at any time, if you do so before age 59 ½ it’s considered an early withdrawal. And though you’d owe income tax on any 401(k) withdrawal, in the case of an early withdrawal, you’d also face a 10% penalty.
There are some exceptions to the 10% penalty, one of which is for a hardship withdrawal.
In the case of an “immediate and heavy financial need,” the IRS may permit a 401(k) hardship withdrawal under specific circumstances — including for the purchase of a primary residence. Hardship withdrawals do not cover mortgage payments, but using a 401(k) for a down payment may be allowed.
Generally, the allowable amount of the hardship withdrawal is determined by the circumstances, plus applicable taxes.
The IRS has strict rules about qualifying for a hardship withdrawal. If you don’t meet them, the funds you withdraw will be subject to income tax and a 10% early withdrawal penalty. And unlike a 401(k) loan, you can’t repay the amount you withdraw, so you permanently lose that chunk of your nest egg.
Pros and Cons of Using a 401(k) to Buy a House
Here are the pros and cons of using a hardship withdrawal or a 401(k) loan, at a glance:
| If you qualify, a hardship withdrawal can provide quick access to funds for a home purchase in an emergency, without a penalty. | A hardship withdrawal cannot be repaid, so the money you withdraw permanently depletes your nest egg. |
| A hardship withdrawal isn’t a loan, so it doesn’t have to be repaid. | You owe ordinary income tax on the amount of the withdrawal. |
| If you don’t qualify for a hardship withdrawal, and you’re under 59 ½, it’s considered an early withdrawal and would be subject to income tax and a 10% penalty. | |
| When using a 401(k) loan, individuals repay themselves, so they don’t owe interest to a bank or other institution. | Because the loan lowers your account balance, your nest egg sees less growth. |
| You don’t pay a penalty or tax on a 401(k) loan, as long as you repay the loan as required. | You must repay the loan with interest, typically within five years, or you’ll owe tax and penalties. |
| You don’t have to meet any credit requirements, and interest rates on 401(k) loans may be lower than for conventional loans. | If a person leaves their job before the loan is repaid, the balance owed could be deducted from the remainder of their 401(k) funds. For those under 59 ½, the amount of the offset would also be considered a distribution and the borrower would likely owe taxes and a 10% penalty. |
| If you miss payments or default on a 401(k) loan, it will not impact your credit score. | In some cases, your plan may not permit you to continue contributing to your 401(k) during the time that you’re repaying the loan — which can dramatically impact your retirement savings over time. |
What Are the Rules & Penalties for Using 401(k) Funds to Buy a House?
Here’s a side-by-side look at some key differences between taking out a 401(k) loan versus taking a hardship withdrawal from a 401(k). Bear in mind that all employer-sponsored plans have their own rules, so be sure to understand the terms.
|
• May or may not be allowed by the 401(k) plan. • Relatively easy to obtain, no credit score required, versus conventional loans. • Qualified loans are penalty free and tax free, unless the borrower defaults or leaves their job before repaying the loan. • You must repay the loan with interest within a specified period. The interest is also considered tax deferred until you retire. • If the borrower doesn’t repay the loan on time, the loan is treated as a regular distribution (a.k.a. withdrawal), and subject to taxes and an early withdrawal penalty of 10%. • The maximum loan amount is 50% of the vested account balance, or $50,000, whichever is less. (If the vested account balance is less than $10,000, the maximum loan amount is $10,000.) |
• May or may not be allowed by the 401(k) plan. • Funds are relatively easy to access, assuming you meet the IRS standards for a hardship withdrawal. • If you meet IRS criteria, you may avoid the 10% penalty normally incurred by an early withdrawal. • You will owe income tax on the amount of the withdrawal. • Withdrawals cannot be repaid, so your account is permanently depleted. • With a hardship withdrawal, you can withdraw only enough to cover the immediate expense (e.g., a down payment, not mortgage payments), plus taxes to cover the withdrawal. |
What Are the Alternatives to Using a 401(k) to Buy a House?
For some homebuyers, there may be other, more attractive options for securing a down payment instead of taking money out of a 401(k) to buy a house, depending on their situation. Here are a few of the alternatives.
Withdrawing Money From a Traditional or Roth IRA
Using a traditional or a Roth IRA to help buy a first home can be an alternative to borrowing from a 401(k) that might be beneficial for some home buyers, because you may be able to avoid the 10% penalty.
If you’re at least 59 ½, you can take a withdrawal from a traditional or Roth IRA without incurring a penalty. You will owe tax on money from a traditional IRA account, but not from a Roth IRA, as long as you’ve had the account for five years.
If you’re under 59 ½, you could face a 10% early withdrawal penalty. One exception is that a first-time home buyer can borrow up to $10,000 from an IRA without incurring a penalty. But the tax treatment differs according to the type of IRA.
• Traditional IRA. A withdrawal for a first-time home purchase may be penalty free, but you will owe tax on the amount you withdraw.
• Roth IRA. Contributions (i.e., deposits) can be withdrawn at any time, tax free. But earnings on contributions can only be withdrawn without a penalty starting at age 59 ½ or older, as long as you’ve held the Roth account for at least five years (a.k.a. the Roth five-year rule).
After the account has been open for five years, Roth IRA account holders who are buying their first home are allowed to withdraw up to $10,000 with no taxes or penalties. The $10,000 is a lifetime limit for a first-time home purchase, for both a traditional and a Roth IRA.
IRA funds can be used to help with the purchase of a first home not only for the account holders themselves, but for their children, parents, or grandchildren.
One important requirement to note is that time is of the essence when using an IRA to purchase a first home: The funds have to be used within 120 days of the withdrawal.
Low- and No-Down-Payment Home Loans
There are certain low- and no-down-payment home loans that homebuyers may qualify for that they can use instead of using a 401(k) for a first time home purchase. This could allow them to secure the down payment for a first home without tapping into their retirement savings.
• FHA loans are insured by the Federal Housing Administration and allow home buyers to borrow with few requirements. Home buyers with a credit score lower than 580 qualify for a government loan with 10% down, and those with credit scores higher than 580 can get a loan with as little as 3.5% down.
• Conventional 97 loans are Fannie Mae-backed mortgages that allow a loan-to-value ratio of up to 97% of the cost of the loan. In other words, the home buyer could purchase a house for $400,000 and borrow up to $388,000, leaving only a down payment requirement of 3%, or $12,000, to purchase the house.
• VA loans are available for U.S. veterans, active duty members, and surviving spouses, and they require no down payment or monthly mortgage insurance payment. They’re provided by private lenders and banks and guaranteed by the United States Department of Veterans Affairs.
• USDA loans are a type of home buyer assistance program offered by the U.S. Department of Agriculture to buy or possibly build a home in designated rural areas with an up-front guarantee fee and annual fee. Borrowers who qualify for USDA loans require no down payment and receive a fixed interest rate for the lifetime of the loan. Eligibility requirements are based on income, and vary by region.
Other Types of Down Payment Assistance
For home buyers who are ineligible for no-down payment loans, there are a few more alternatives instead of using 401(k) funds:
• Down Payment Assistance (DAP) programs offer eligible borrowers financial assistance in paying the required down payment and closing costs associated with purchasing a home. They come in the form of grants and second mortgages, are available nationwide, can be interest-free, and sometimes have lower rates than the initial mortgage loan.
• Certain mortgage lenders provide financial assistance by offering credits to cover all or some of the closing costs and down payment.
• Gifted money from friends or family members can be used to cover a down payment or closing costs on certain home loans. As the recipient of the gift, you won’t owe taxes on the gift; the giver may have to pay a gift tax if the amount exceeds $19,000 for 2025.
Using Gift Funds for a Down Payment
By and large there are no restrictions on using gift funds — money given to you as a gift, not a loan — for a down payment on a home. The use of gift funds as part of a home buyer’s down payment has become more common, in fact. Nearly 40% of borrowers included some gift money as part of their downpayment, according to a 2023 survey by Zillow.
Gifts are allowed when applying for a conventional mortgage, as well as for Fannie Mae and FHA loans. In some cases, you may be required to provide a gift letter that documents that the money is a gift and not a loan. Again, the recipient generally doesn’t owe federal tax on a monetary gift, but the giver may owe a gift tax, depending on the amount.
How Using a 401(k) for a Home Purchase Affects Retirement Savings
Using your 401(k) money for anything but retirement has a very real down side, which is that it reduces the amount of money in your retirement account, even if that’s temporary, as it is with a 401(k) loan. As a result, you also lose out on any potential growth from your retirement investments.
With a 401(k) loan, you repay the amount of the loan with interest (and if you don’t you’ll owe taxes and penalties). Even so, you’ve depleted your account for a period of time, and, depending on the rules of your particular plan, you could be prohibited from making any contributions while you repay the loan.
The impact of a hardship withdrawal can be even more severe, because you’re not allowed to repay the amount you withdrew. So you lose a chunk of your savings, and you forgo the growth on that amount as well. In addition, some employer-sponsored plans may prohibit you from making contributions after taking a hardship withdrawal.
Impact on Long-Term Investment Growth
In other words, while there’s no 10% tax penalty for taking out a 401(k) loan or a hardship withdrawal, you do face a potential missed opportunity in that the amount you take out of the account is no longer invested in the market.
Thus, you lose out on any potential long-term investment growth — which can significantly cut into your potential retirement savings, when you think of the money you’re not earning, perhaps for many years.
The Takeaway
Generally speaking, a 401(k) can be used to buy a principal residence, either by taking out a 401(k) loan and repaying it with interest, or by making a 401(k) withdrawal (which is subject to income tax and a 10% withdrawal fee for people under age 59 ½).
If you meet the IRS criteria for a hardship withdrawal, though, you may avoid the 10% penalty, if your plan allows this option.
However, using a 401(k) for a home purchase is usually not advisable. Both qualified loans and hardship withdrawals have some potential drawbacks, including owing taxes and a penalty in some cases, and the potential to lose out on market growth on your savings. Fortunately, there are less risky options, as noted above. Making these choices depends on your financial situation and your goals, as well as your stomach for risk — especially where your future security is concerned.
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FAQ
What are the downsides of using a 401(k) to buy a house?
The main drawback of using funds from your 401(k), or any retirement account, is the potential loss of savings and investment earnings on that savings, which could substantially reduce your retirement nest egg.
When can you withdraw from a 401(k) without penalty?
If your plan permits a 401(k) loan, or if you qualify for a hardship withdrawal from your 401(k), you won’t be on the hook for a 10% penalty. But you would have to repay the loan with interest, and you would owe tax on the money taken for a hardship withdrawal.
Can you withdraw money from a 401(k) for a second house?
While it’s technically possible to withdraw money from a 401(k) for a second home, you would owe taxes and a 10% penalty on the amount you withdrew, so it’s not advisable.
How much can you take out of an individual IRA to buy a home?
You can withdraw up to $10,000 from an IRA for the purchase of a first home, but you would owe tax on that money (although you might avoid a 10% penalty).
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