Can I Use My Retirement Account to Buy a House?

You can use your retirement accounts to buy a house, and federal law carves out specific breaks for Traditional IRAs, Roth IRAs, and 401(k) plans when the money goes toward a home. The best-known is a $10,000 lifetime exception from the 10 percent early withdrawal penalty on IRA distributions used for a first home. A 401(k) gives you a different set of tools: a loan against your balance or, in some cases, a hardship withdrawal. Each path has its own dollar limit, tax consequence, and timing trap.

The $10,000 Traditional IRA Exception

If you have a Traditional IRA, you can withdraw up to $10,000 over your lifetime to buy a first home without paying the 10 percent penalty that normally applies to distributions before age 59½.¹ The cap is a lifetime number, not an annual one. Once you use it, no further penalty-free homebuyer withdrawals are available from any Traditional IRA you own.

The IRS definition of “first-time homebuyer” is broader than the label suggests. You qualify as long as you and your spouse have not owned a principal residence during the two-year period ending on the date you acquire the new home. If you owned a home five years ago but have rented since, you can still use the exception. You can also use the money to help a spouse, child, grandchild, parent, or grandparent buy a home, as long as that person independently meets the two-year test.¹

If you and your spouse each have an IRA, each of you can withdraw $10,000 under the exception, for a combined $20,000 toward the same purchase.¹

The penalty waiver does not erase income tax. The full amount you pull from a Traditional IRA is taxed as ordinary income in the year you receive it. Depending on your bracket, that bill can be substantial, so build it into your home-buying math before you request the distribution.

The 120-Day Deadline

You have 120 days from the date you receive the IRA distribution to use it on home acquisition costs.² If the purchase falls through or drags past that window, the distribution loses the penalty exception.

There is a safety valve. If the deal cancels or stalls, you can recontribute the money to an IRA within 120 days and avoid both the income tax and the penalty. This special recontribution does not count against the normal once-per-year IRA rollover limit.³

Roth IRA Withdrawals

A Roth IRA is more flexible because of how the IRS orders withdrawals. Your original contributions always come out first, and because you already paid income tax on that money before contributing, you can pull your contributions at any time, at any age, with no tax and no penalty.⁴ There is no dollar limit, and you do not need to qualify as a first-time homebuyer.

The rules tighten once you reach the earnings in the account. Earnings come out tax-free and penalty-free only if two things are true: the account has been open at least five tax years, and the distribution fits an exception such as the first-time homebuyer rule, which caps earnings at $10,000 lifetime.¹ Meet both conditions and that $10,000 in earnings comes out entirely tax-free.

If your Roth is less than five years old, the homebuyer exception still waives the 10 percent penalty on earnings, but the earnings are taxed as ordinary income.⁵ The five-year clock starts on January 1 of the tax year you made your first Roth contribution. An account first funded in December 2022 is treated as having started on January 1, 2022, and meets the five-year rule on January 1, 2027.

What Counts as Qualified Acquisition Costs

The $10,000 exception, for both Traditional and Roth IRAs, covers more than the down payment. Qualified acquisition costs include the price of buying, building, or rebuilding a residence, along with the settlement, financing, and closing costs that come with a real estate transaction.⁶ Title insurance, appraisal fees, and attorney fees generally qualify. Mortgage payments after closing do not.

Borrowing From a 401(k)

If you have an employer-sponsored 401(k), you may be able to borrow against your vested balance instead of making a permanent withdrawal. The federal limit is the lesser of $50,000 or 50 percent of your vested balance. If 50 percent of your balance is under $10,000, some plans allow you to borrow up to $10,000.⁷ Not every plan offers loans, so start by asking your plan administrator.

Because you are borrowing from yourself, a 401(k) loan is not a taxable event. The money is not income, there is no early withdrawal penalty, and you repay the loan with interest back into your own account.

Standard 401(k) loans must be repaid within five years, but federal law exempts loans used to buy a primary residence from that five-year ceiling.⁸ The statute does not set a replacement maximum. Each plan writes its own repayment schedule for residential loans, and most require substantially level payments made at least quarterly.

What Happens if You Leave Your Job

Job separation is the biggest risk of a 401(k) loan. If you leave your employer, voluntarily or not, while a loan is outstanding, most plans give you only 60 to 90 days to repay the remaining balance. If you cannot, the unpaid amount is treated as a distribution. Your plan reduces your account by that amount, called a plan loan offset, and the offset becomes taxable income.⁹ If you are under 59½, you also owe the 10 percent penalty on it.

You can avoid the tax by rolling the offset amount into another eligible retirement plan. For a qualified plan loan offset, meaning one triggered by plan termination or severance, you have until your tax filing due date (including extensions) for the year of the offset to complete the rollover.⁹ You would need to pull the rollover amount from other funds, since the offset itself is never paid out in cash.

401(k) Hardship Withdrawals

If your plan does not allow loans, or you need more than the loan limit permits, a hardship distribution may be available. Federal regulations treat costs directly related to buying a principal residence, other than mortgage payments, as a qualifying financial hardship.¹⁰ Under rules that took effect in 2023, your plan may let you self-certify that you meet the hardship conditions rather than submit documentation upfront.

Hardship distributions are permanent. You cannot repay them, and the IRS classifies them as distributions not eligible for rollover, so there is no way to undo the tax hit later.¹¹ The full amount is taxed as ordinary income in the year you receive it.

One boundary matters here: the first-time homebuyer penalty exception does not apply to 401(k) plans. It covers only distributions from individual retirement plans.¹ If you take a 401(k) hardship withdrawal before age 59½, you owe the 10 percent penalty on top of income tax, unless a different exception applies, such as separating from that employer in the year you turn 55 or older.

Claiming the Exception on Your Tax Return

Your custodian or plan administrator will send a Form 1099-R for the year of the distribution. For IRA withdrawals before 59½, the form usually shows distribution code 1 in Box 7, meaning early distribution with no known exception. The IRS expects you, not the custodian, to claim the penalty exception.¹²

File Form 5329 with your tax return and enter exception number 09 on the appropriate line to claim the first-time homebuyer waiver.¹³ Keep your purchase agreement and closing disclosure. If the IRS questions the exception, those documents show the money went to a qualifying purchase within the 120-day window.

State Income Tax

Federal rules are only part of the bill. Most states tax retirement account distributions as ordinary income, with rates ranging from zero in states without an income tax to over 13 percent in the highest-tax states. Few states offer a penalty exemption that mirrors the federal first-time homebuyer provision, so your state tax on an early withdrawal may run higher than you expect. Check your state’s rules before you commit to a withdrawal amount.

How to Request the Money

To start, contact your IRA custodian or your employer’s plan administrator. For workplace plans, you typically go through HR or a third-party administrator’s portal. Distribution and loan forms ask for a reason code identifying the transaction as a home purchase, which drives how the distribution is reported to the IRS.

Processing usually takes a few business days to two weeks after the paperwork is in. In many real estate closings, the check is made payable directly to the title company or escrow agent so the funds move straight into the transaction. If your closing date is firm, submit the request well in advance so a processing delay does not push you past the 120-day deadline on an IRA distribution.

1
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
2
Internal Revenue Service. Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)
3
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts – Section 72(t)(8)(E)
4
Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs
5
Fidelity. What Is the Roth IRA 5-Year Rule and How Does It Work?
6
Legal Information Institute. Definition: Qualified Acquisition Costs from 26 USC 72(t)(8)
7
Internal Revenue Service. Retirement Topics – Loans
8
Internal Revenue Service. Issue Snapshot – Plan Loan Cure Period
9
Internal Revenue Service. Plan Loan Offsets
10
eCFR. 26 CFR 1.401(k)-1 – Certain Cash or Deferred Arrangements
11
Internal Revenue Service. Topic No. 424, 401(k) Plans
12
Internal Revenue Service. Instructions for Forms 1099-R and 5498
13
Internal Revenue Service. Instructions for Form 5329