Yes, you can use your 401(k) to buy a second home, and for most buyers the workable path is a plan loan rather than a withdrawal. A loan lets you borrow up to $50,000 from your own account with no income tax and no penalty, provided you repay it within five years. A straight withdrawal is far more expensive: the full amount is taxable income, and if you’re under 59½ the IRS adds a 10% early withdrawal penalty on top. Which route makes sense depends on your plan’s rules, your age, and how much long-term growth you’re willing to give up.
Start With Your Plan Document
Federal law sets the outer limits, but your employer’s plan decides what you can actually do. Not every 401(k) offers loans, and some that do restrict the reasons you can borrow. The Summary Plan Description, available through HR or your benefits portal, is the controlling document.1Internal Revenue Service. Retirement Topics – Loans If your plan doesn’t allow participant loans, the rest of this doesn’t help.
One boundary to name up front: a hardship withdrawal will not work for a second home. The IRS safe harbor for “immediate and heavy financial need” covers the purchase of a principal residence, but it specifically excludes second homes and vacation properties.2Internal Revenue Service. Retirement Topics – Hardship Distributions A second home is actually treated as an available resource that counts against hardship eligibility.3Internal Revenue Service. Retirement Plans FAQs Regarding Hardship Distributions Your two real options are a plan loan or a taxable distribution.
How the 401(k) Loan Works
How Much You Can Borrow
Federal law caps 401(k) loans at the lesser of $50,000 or 50% of your vested account balance, with a floor of $10,000.4Office of the Law Revision Counsel. 26 US Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts With a vested balance of $200,000, the cap is $50,000. At $60,000 vested, it’s $30,000. At $15,000, the $10,000 floor lets you borrow that instead of being held to $7,500. The limits apply to all outstanding loans across your employer’s qualified plans combined.
There’s also a 12-month lookback that surprises people. The $50,000 cap is reduced by your highest outstanding loan balance during the prior 12 months, minus your current balance.5Internal Revenue Service. Retirement Plans FAQs Regarding Loans If you borrowed $40,000 last year and paid it down to $10,000, your new maximum is $50,000 minus ($40,000 – $10,000), which is $20,000. Paying an earlier loan down quickly doesn’t fully restore your borrowing room.
Five Years to Repay
This is where second-home buyers feel the pinch. Federal law requires repayment within five years with substantially level payments made at least quarterly.4Office of the Law Revision Counsel. 26 US Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts The extended repayment window of 15 or more years that some plans allow for a home loan is limited by statute to a dwelling that will serve as the participant’s principal residence. A vacation house, second home, or rental doesn’t qualify.
On a $50,000 loan, five-year repayment lands somewhere around $950 to $1,000 a month in payroll deductions depending on the rate. That sits on top of the mortgage, taxes, and insurance on the new property, and your take-home pay drops noticeably while the loan runs.
Interest Rate
Plan administrators set the rate based on prevailing commercial lending rates, often prime plus one or two percentage points. With the Wall Street Journal prime rate at 6.75% as of early 2026, expect something in the 7.75% to 8.75% range. Interest goes back into your own account, which softens but does not erase the opportunity cost of pulling the balance out of your investments.
Spousal Consent
If your plan is subject to the joint and survivor annuity rules, your spouse must give written consent before the plan can use your accrued benefit as collateral, and that consent has to be obtained within 180 days before the loan is secured.6Internal Revenue Service. Spousal Consent Period to Use an Accrued Benefit as Security for Loans Many 401(k) plans have opted out of these rules, so this doesn’t apply everywhere. Your plan administrator can confirm whether it applies to you.
Why a Direct Withdrawal Is Usually a Bad Trade
A straight distribution before 59½ triggers a 10% additional tax on the entire taxable amount. The $10,000 first-time homebuyer exception people sometimes ask about does not help: it applies only to IRAs, and the IRS exception table explicitly marks it as unavailable for qualified plans like 401(k)s.7Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions Even if it did, it would only cover a primary residence.
Withholding is automatic. When a distribution is paid to you rather than rolled over, the plan must withhold 20% for federal taxes before releasing the funds.8Internal Revenue Service. 401(k) Resource Guide – Plan Participants – General Distribution Rules On a $100,000 withdrawal you receive $80,000; the IRS gets $20,000 up front. The full $100,000 counts as ordinary income for the year, and your final bill could be higher than what was withheld. Most states with an income tax treat the distribution as taxable too.
Over 59½, the 10% penalty falls away, but income tax and mandatory withholding remain. For someone in the 24% federal bracket living in a state with a 5% income tax, a $100,000 distribution costs about $29,000 in taxes. Under 59½, add roughly $10,000 in penalties. Actual purchasing power on that $100,000 lands somewhere between $61,000 and $71,000.
Roth 401(k) contributions change the picture. Because you funded them with after-tax dollars, a qualified distribution of contributions comes out tax-free. To qualify, you generally need to be at least 59½ and to have held the Roth account for at least five years. Earnings that fall outside those conditions are taxable and can still draw the 10% penalty. Not every plan permits in-service Roth distributions, so the plan-document check applies here too.
What Happens If You Leave Your Job With a Loan Outstanding
This is the risk most borrowers underweight. If you resign, get laid off, or are terminated while a loan is outstanding, the plan generally treats the unpaid balance as a distribution and reports it on Form 1099-R.1Internal Revenue Service. Retirement Topics – Loans The remaining amount becomes taxable income, and under 59½ it also draws the 10% penalty.
There is a way out. If the balance is treated as a qualified plan loan offset because of your separation, you can roll that amount into an IRA or another eligible retirement plan by the due date of your tax return, including extensions, for the year of the offset.1Internal Revenue Service. Retirement Topics – Loans For a 2026 separation, that typically means October 2027 with an extension. The problem is finding the cash to fund the rollover, since the borrowed money is already in the house.
Missing a scheduled payment while still employed can produce a similar outcome. The outstanding balance plus accrued interest becomes a deemed distribution subject to income tax and, where applicable, the 10% penalty.9Internal Revenue Service. Deemed Distributions – Participant Loans Some plans offer a cure period; federal rules don’t require one.
The Long-Term Cost
Taxes and penalties are only the visible part of the bill. The larger loss is the growth the money would have produced had it stayed invested. At a 7% average annual return, $50,000 removed at age 40 would have grown to roughly $270,000 by 65. Even a loan you repay in full has a cost, because during the repayment years the balance earns your plan’s loan rate instead of market returns. A small annual gap between the two compounds meaningfully over decades.
The monthly payment can also crowd out new contributions. If $950 a month is going to loan repayment, some participants scale back their regular 401(k) contributions to protect take-home pay. Every dollar not contributed also forfeits any employer match it would have earned, and that shortfall runs well past the loan amount itself.
How the Loan Affects Your Mortgage Application
If you’re financing the second home and using the 401(k) loan for the down payment, the interaction matters. The loan creates a monthly obligation. Some mortgage underwriters include that payment in your debt-to-income ratio; others exclude it because you’re paying yourself back rather than an outside creditor. Confirm the treatment with your specific lender before assuming it won’t affect what you can borrow.
You’ll also need to document the source of the down payment. Lenders typically want to see the 401(k) disbursement land in your bank account along with your plan’s loan approval paperwork. Unexplained large deposits raise flags in underwriting, so keep the records organized from the start.
Requesting the Funds
Start by confirming your vested balance, not the total balance on your statement. Vested balance is the portion of employer contributions you’ve earned under the plan’s vesting schedule, plus 100% of your own contributions. Contact the plan administrator or log into your benefits portal for the exact figure and the loan application.
On the application, select “plan loan” rather than a hardship distribution, enter an amount within the legal limits, and choose your repayment terms. Some plans ask for the purpose of the loan; language like “purchase of real property” works. Verify that the requested amount respects the 12-month lookback if you’ve had a prior loan.
Most plans accept applications through a secure online portal with immediate confirmation. The administrative review typically takes three to seven business days. Once approved, funds usually arrive within about two business days by direct deposit, or longer for a physical check. Build a buffer into your closing schedule. Missing a closing date because a disbursement ran slow is an expensive way to save on paperwork.