Can I Use My 401(k) To Buy a House?

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on September 08, 2023

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Can I Use My 401(k) to Buy a House?

Yes, it is technically possible to use your 401(k) to buy a house, but it's generally not recommended unless it's absolutely necessary. If you decide to do so, you have two options: take out a 401(k) loan or make a "hardship withdrawal."

A 401(k) loan allows you to borrow money from your account with the agreement to pay it back within a specified timeframe. Remember, though, that if you leave your job, the loan may need to be paid back quickly, typically within 60 days.

Hardship withdrawals, on the other hand, allow you to take money out of your 401(k) without needing to pay it back. However, these withdrawals are subject to income tax and a 10% early withdrawal penalty if you're under the age of 59½.

Both options have the potential to derail your long-term retirement savings, so it's crucial to weigh all your options carefully.

Process and Legalities of Using a 401(k) to Buy a House

A 401(k) loan allows you to borrow money from your retirement account. You're essentially borrowing from yourself, with the understanding that you'll repay the loan with interest over a set period.

Process to Withdraw Funds for Home Purchase

The process for withdrawing funds from your 401(k) for a home purchase varies depending on your plan's rules. Generally, you would submit a request to your plan administrator, specifying that the loan is for the purchase of a primary residence.

401(k) Withdrawal Rules and Regulations

401(k) accounts are regulated by the IRS, and there are specific rules about when and how you can access your money.

Typically, you can only withdraw funds from your 401(k) after you reach 59.5 years old, become permanently disabled, or upon your death. However, there are exceptions for specific situations, including buying a house.

"Hardship Withdrawal" Provision and Homebuyer Exemption

The IRS allows "hardship withdrawals" from 401(k)s under certain circumstances, which include buying a house. However, these withdrawals are subject to income tax, and if you're under 59.5, a 10% early withdrawal penalty may apply.

Process and Legalities of Using a 401(k) to Buy a House

Pros of 401(k) to Buy a House

Immediate Access to Funds

One of the main advantages of using your 401(k) to buy a house is that it gives you access to large sums of money without the need for loan approval from a bank.

Possibility of Lower Interest Rates

Another benefit is that the interest rate on a 401(k) loan may be lower than what you'd receive on a mortgage loan, which can save you money over time.

No Impact on Credit Score

Taking a loan from your 401(k) doesn't affect your credit score, as it's not reported to credit bureaus. This aspect is particularly beneficial for those with low credit scores.

Repayment to Own Account

When you take a loan from your 401(k), you're essentially paying yourself back with interest. This means that you're contributing to your retirement savings while also financing your home.

Cons of 401(k) to Buy a House

Potential for Reduced Retirement Savings

The most significant downside of using a 401(k) to buy a house is that it can seriously impact your retirement savings.

If you fail to repay the loan, or if you leave or lose your job before repayment is complete, the outstanding balance can become a taxable distribution, and penalties may apply.

Risk of Paying Double Taxation

While you pay the interest on your 401(k) loan back to yourself, that money will be taxed again when you withdraw it in retirement, meaning you're effectively paying double taxation.

Dangers of Default and Early Withdrawal Penalties

If you default on your 401(k) loan, the IRS will treat it as an early distribution, which can lead to hefty taxes and penalties. Additionally, if you make a hardship withdrawal, you may also face a 10% early withdrawal penalty if you're under 59.5 years old.

Impact on Future Contributions

Some 401(k) plans don't allow you to make additional contributions until you've repaid your loan. This can inhibit the growth of your retirement savings and set you back in your financial planning.

Pros and Cons of 401(k) to Buy a House

Alternatives to 401(k) to Buy a House

Traditional Mortgage Loans

Standard mortgages are the most common way people buy homes. They typically offer lower interest rates for those with good credit scores and stable income, and you can choose from a variety of repayment terms.

Federal Housing Administration (FHA) Loans

FHA loans are government-insured mortgages designed for low-to-moderate-income borrowers. They require a lower minimum down payments and credit scores than many conventional loans.

Veterans Affairs (VA) Loans

If you're a veteran, you may be eligible for a VA loan. These loans often offer competitive interest rates and don't require a down payment.

First-Time Homebuyer Programs

Numerous state and local governments offer first-time homebuyer programs that provide down payment assistance or competitive mortgage rates.

Alternatives to 401(k) to Buy a House

Steps to Take Before Using 401(k) to Buy a House

Consider Financial Situation

Before deciding to use your 401(k) to buy a house, consider your overall financial situation. If you have other savings or can qualify for a traditional mortgage, it may be better to leave your retirement savings intact.

Seek Professional Financial Advice

Because of the potential risks and complexities, it's wise to seek advice from a financial advisor before making a decision about using your 401(k) to buy a house.

Explore All Available Options

Ensure you have explored all your options for home financing. Look into mortgages, government assistance programs, and other alternatives before tapping into your retirement savings.

Understand the Long-Term Impact on Retirement Savings

Consider the long-term impact on your retirement savings. Remember, the money you withdraw from your 401(k) for a house will not be there to grow and provide for your retirement.

Steps to Take Before Using 401(k) to Buy a House

Conclusion

Tapping into your 401(k) to buy a house is possible but comes with risks that could impact your retirement savings.

Options include taking a 401(k) loan or making a hardship withdrawal, both of which have specific processes and regulations governed by the IRS.

Advantages include immediate access to funds and possibly lower interest rates, with no impact on your credit score.

However, downsides include potentially reduced retirement savings, risk of double taxation, penalties on default or early withdrawal, and possible impact on future contributions.

Explore alternatives such as traditional mortgages, FHA loans, VA loans, or first-time homebuyer programs before deciding.

Given the complexities, it's advisable to consider your overall financial situation and consult with a financial advisor to understand the long-term impact on your retirement savings before using your 401(k) to finance a home.

Can I Use My 401(k) To Buy a House? FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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