You can use your 401(k) to buy a second home, but the only clean way to do it is through a plan loan, not a withdrawal. Federal law caps that loan at the lesser of $50,000 or a portion of your vested balance, and because a second home isn’t your primary residence, you have to pay it back within five years.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Between lost investment growth and the tax hit if you leave your job before the loan is repaid, the real cost is higher than the interest rate suggests.
How Much You Can Borrow and How Long You Have
The federal borrowing limit is the lesser of two numbers. The first is $50,000, reduced by the difference between the highest outstanding loan balance you had in the past 12 months and your current balance. The second is the greater of half your vested account balance or $10,000.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Someone with $15,000 vested can still borrow $10,000 thanks to that floor. Someone with $300,000 vested is still capped at $50,000.
Your plan can set tighter limits than federal law requires. Some cap the dollar amount lower, some allow only one outstanding loan at a time, and not every 401(k) plan offers loans at all. Your Summary Plan Description or plan administrator is where you confirm what’s actually available to you.
Repayment for a second-home loan runs five years, made in roughly equal payments at least quarterly, usually through automatic payroll deduction.2Internal Revenue Service. Retirement Topics – Loans The extended repayment period that stretches beyond five years exists only for loans used to buy a home you’ll live in as your primary residence.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts A vacation home, an investment rental, or any other second property gets the standard five-year clock.
Interest rates on 401(k) loans are commonly set at one point above the prime rate. With prime at 6.75% in early 2026, that puts a typical loan around 7.75%.3Federal Reserve. H.15 – Selected Interest Rates (Daily) Plans also commonly charge a $50 to $100 origination fee and a recurring maintenance fee. The interest goes back into your own account rather than to a bank, which is the source of the “you’re paying yourself” line — a line that hides real costs discussed further down.
Why a Hardship Withdrawal Won’t Work Here
A hardship withdrawal is a permanent distribution, not a loan. The IRS allows it only for an immediate and heavy financial need, and buying a principal residence is one of the safe-harbor reasons that qualifies.4Internal Revenue Service. Retirement Topics – Hardship Distributions A second home doesn’t. The IRS treats it as a discretionary purchase, so plan administrators will deny a hardship request for a vacation home or an investment property.
The IRA first-time homebuyer exception, which lets you pull up to $10,000 penalty-free from an IRA, doesn’t help either. It’s limited to first-time buyers and applies only to IRAs, not 401(k) plans.5Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
If You’re Over 59½, You Have a Third Option
Once you reach 59½, the 10% early withdrawal penalty is off the table. If your plan permits in-service withdrawals, you can take a straightforward distribution while still employed, pay ordinary income tax on the amount (for a traditional pre-tax 401(k)), and spend the money on whatever you want.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts No repayment schedule, no five-year clock, no job-loss risk.
Not every plan allows in-service withdrawals, and some cap the amount. If your plan has a Roth 401(k) component and you’ve participated for at least five years, a qualified distribution after 59½ comes out entirely tax-free, including earnings.6Internal Revenue Service. Roth Acct in Your Retirement Plan That’s the most tax-efficient way to fund a second home from a 401(k) if the pieces line up.
What Happens If You Leave Your Job Before the Loan Is Paid Off
This is where a 401(k) loan for a second home turns genuinely risky. If you leave your employer for any reason — quit, layoff, retirement — the plan can require you to repay the outstanding balance in a short window, often around 90 days from your last day.2Internal Revenue Service. Retirement Topics – Loans
If you can’t repay in time, the unpaid balance becomes a plan loan offset. The plan reduces your account by the unpaid amount, and that offset is treated as a taxable distribution. Under 59½, you also owe the 10% early withdrawal penalty on top of the income tax.7Internal Revenue Service. Retirement Plans FAQs Regarding Loans
There’s one safety valve. When the offset happens because you separated from employment, it counts as a “qualified plan loan offset,” and you have until your tax filing deadline (including extensions) for that year to roll the amount into an IRA or another retirement plan and avoid the tax entirely.8Internal Revenue Service. Plan Loan Offsets The catch is practical: you have to come up with that cash from somewhere else, because the loan proceeds are already tied up in a house.
A deemed distribution, which happens when you default on payments while still employed, is worse. It cannot be rolled over into another retirement account at all.7Internal Revenue Service. Retirement Plans FAQs Regarding Loans The tax hit is permanent.
A concrete example. Default on a $30,000 balance while you’re in the 22% federal bracket and under 59½: $6,600 in federal income tax plus a $3,000 penalty, so $9,600 before state tax. Most states tax retirement distributions and add their own layer. People usually don’t feel the size of this until the 1099-R shows up in January.9Internal Revenue Service. Instructions for Forms 1099-R and 5498
The Cost You Don’t See on the Loan Paperwork
The interest goes back into your own account, so the loan feels free. It isn’t. The real cost is the growth those dollars would have earned if they’d stayed invested. Pull $50,000 out of a diversified portfolio for five years and that money sits on the sideline. You’re paying yourself around 7.75%, but if the market averaged 9% or 10% over that stretch, the difference is gone from your balance permanently, along with all the compounding it would have thrown off for the next twenty or thirty years.
The interest payments carry a quieter tax cost too. You repay the loan with after-tax dollars from your paycheck, and when that money eventually comes out in retirement, it gets taxed again as ordinary income. The interest portion is hit hardest by this because it represents new dollars going into the account: taxed on the way in, taxed again on the way out.
Over a full retirement horizon, the compounding gap from a $50,000 loan can easily exceed the loan amount itself. That doesn’t make the move wrong in every case. It does mean the true price tag is well above the interest rate on the promissory note.
Other Sources Worth Comparing First
Before pulling from retirement, look at what else can carry the purchase.
- A home equity loan or HELOC on your primary residence gives you access to a larger sum than the $50,000 401(k) cap and stretches repayment across 20 or 30 years, and your retirement stays invested. The trade is that your primary home becomes collateral, and missing payments puts it at risk.
- A conventional mortgage on the second property is what lenders are built for. Second homes typically require a larger down payment, often 10% to 20%, at a slightly higher rate than a primary residence. Some borrowers use a 401(k) loan for the down payment and a mortgage for the rest, but that stacks three obligations on one purchase.
- Roth IRA contributions (not earnings) can be withdrawn at any time, for any reason, tax- and penalty-free. For someone with a long-established Roth, that’s a source of down payment cash that doesn’t create job-loss risk.
How to Actually Take the Loan
If a 401(k) loan is still the right call, start with your Summary Plan Description. Confirm loans are allowed, note any plan-specific minimum, check whether more than one loan can be outstanding, and see whether spousal consent is required. Federal law allows plans to require a spouse’s written consent before issuing a loan.7Internal Revenue Service. Retirement Plans FAQs Regarding Loans
Pull your current vested balance from your benefits statement or online portal. The vested balance is the portion you fully own — all your own contributions plus any employer contributions that have vested under the plan’s schedule. That number sets your borrowing ceiling.
Most administrators handle the application through an online portal. You specify the amount, the repayment frequency, and the bank account for the deposit, then sign a promissory note.10eCFR. 26 CFR 1.72(p)-1 – Loans Treated as Distributions Funds usually arrive within a few business days after approval.
Repayments come out of your paycheck automatically in most plans. Watch them. A missed quarterly payment you don’t catch quickly can flip the whole remaining balance into a deemed distribution, and that tax event can’t be undone.