Can I use my 401(k) to buy a house?

Buying a house can come with high costs, between high interest rates and hefty down payments — according to Realtor.com, the median down payment was around $26,000 at the start of the year. To pay the upfront costs, some homebuyers use retirement funds to buy a house by accessing their 401(k) plans.

Depending on the investment, it can be a financially wise move to do so if it can make homeownership a reality. However, like any financial decision, there are consequences you should consider before moving forward. Not only are there penalties for making an early withdrawal, but you’re also potentially reducing your retirement income. 

Here’s how a 401(k) works, how to use the funds, pros and cons of using your 401(k) to buy a house, and other options you may want to consider. 

What is a 401(k) and how does it work?

A 401(k) is a retirement savings account where any contributions you make are excluded from your taxable income. The plan is typically set up by your employer, and you can choose how much to put in. Depending on where you work, certain employers may match your contributions up to a limit. 

There are limits to how much you can contribute to your 401(k). The current limit is $23,000 a year. If you make $80,000 a year, and you contribute $23,000, your taxable income would be $57,000. 

If you are over the age of 50, you can contribute an extra $7,500 to catch up, which makes the annual contribution limit $30,500. 

Can you use a 401(k) to buy a house?

You can withdraw some of your 401(k) funds to buy a house if your plan allows. However, depending on how old you are, you may have to pay an additional penalty tax. Unless you are 59½ years old or older, there is a 401(k) early withdrawal penalty of 10%.

However, you can also borrow against your account and take out a 401(k) loan. With this option, there’s no 10% penalty and you aren’t increasing your taxable income. If you get a 401(k) loan, you can typically borrow up to $50,000 or half of the vested value (whichever is less). 

If you’re ready to buy a house, a 401(k) can help make it a reality. You could use the additional funds for closing costs or to make a larger down payment, which can reduce your loan amount and overall costs.

What are the options for using a 401(k) for home purchase?

You have two options when it comes to using your funds in your 401(k) account to buy a house. You can use a 401(k) loan for a house purchase, or you can make an early withdrawal from your 401(k) funds. Your employer might set limits on how much you can take for an early withdrawal, but if you are able to take out a large enough amount, you could buy a house outright. But, you could also withdraw or borrow from your 401(k) and put the funds toward your down payment. 

Data from the National Association of REALTORS® (NAR) found that the average first-time homebuyer made a down payment of just 8% last year. The more you borrow, the higher your monthly payments will be. If you’re applying for a conventional loan, lenders might require you to pay for private mortgage insurance if your down payment is less than 20%.

What are the pros and cons of using a 401(k) to buy a house?

Using retirement funds to buy a house can be a good idea, but there are consequences to keep in mind. For one, 401(k) withdrawal rules are quite specific; the money is meant for your retirement, so taking money out early is discouraged by taxing it as income and adding a penalty.

Consider the benefits and drawbacks of a 401(k) loan and a non-loan 401(k) distribution.

Here are the pros and cons of a 401(k) distribution: 

Here are the pros and cons of a 401(k) loan:

In addition, it can be difficult to purchase a house if you’re a first-time buyer. While there are programs for first-time homebuyers, qualifying for one of them can be difficult if you make too much money or the type of house you want to buy is outside of the maximum limit for your area. Accessing your 401(k) funds can help you overcome some of these hurdles. 

Alternatives to using your 401(k) for a home purchase

If you’re having trouble coming up with the down payment for a home purchase, there are a few alternatives to consider.

For example, there are first-time homebuyer programs in each state. Those programs can come in a variety of forms, such as grants, forgivable loans, and mortgages. They are intended to help low-income buyers afford the down payment needed to buy a home. Search for your state or city to see if there are resources you qualify for.

There are also zero-down-payment mortgages, too, such as USDA and VA loans. USDA loans require you to purchase a home in a rural area in need of economic development, but that doesn’t mean you have to buy a farmhouse; some homes you wouldn’t expect to qualify for USDA loans are eligible. You can input a home’s address into the USDA eligibility map to see if it would qualify for a USDA loan

VA loans are for current and retired military, as well as their surviving spouses. Like USDA loans, VA loans don’t require a down payment. You’ll need to pay a funding fee, which can range from 1.25% to 3.3% of the loan amount.

Can I use my 401(k) to buy a house FAQ

What is a hardship withdrawal from a 401(k)?

A hardship withdrawal 401(k) allows the account holder to use funds from their plan to pay for certain expenses. The amount withdrawn must only satisfy the financial need and be used for an “immediate and heavy” need, such as medical expenses, funeral costs, or making payments to avoid eviction. While it depends on the situation, the 10% penalty for making an early withdrawal may be removed.

Unfortunately, making a withdrawal from your 401(k) to buy a house can’t be done without the 10% penalty. If you have an IRA, however, the 10% penalty is removed if you are a first-time homebuyer, which the IRS defines as anyone who hasn’t owned a house in the past two years.

What are the tax implications of using a 401(k) for a house?

There is a 10% penalty for making an early withdrawal if you are under 59½ years old. The amount withdrawn will be considered taxable income, which means it will be added to your gross income for the year. You will have to pay taxes on it at the relevant tax rate. It’s important to be mindful of this because the withdrawal could bump you up to a higher tax bracket.

Are there any penalties for using a 401(k) to buy a house?

There is a 10% penalty for withdrawing funds before you are 59½. Besides the 10% fee, you also need to consider the fact that the money will be considered taxable income, which means you will also have to pay taxes on it. 

What are the repayment rules for a 401(k) loan?

A 401(k) home loan repayment must be made at least quarterly, but any payments you make are not going toward your investment growth. 

Should I use my 401(k) to buy a house?

It’s important to weigh the financial benefits of homeownership — such as fixed monthly payments and equity building — against the cost of reducing your retirement savings at this point in your life. Consider looking for no-down-payment and low-down-payment mortgage options to reduce the amount of money you need to save.