Can You Borrow From Your Pension to Buy a House?

You can borrow from a workplace retirement plan to buy a house if the plan is an individual-account plan like a 401(k), 403(b), or governmental 457(b) and the plan document permits loans. Traditional defined benefit pensions rarely offer this, and IRAs never do. So the phrase “borrow from pension to buy a house” usually points at a 401(k)-style loan rather than a loan from an old-style pension. Federal law caps the amount at $50,000 or half your vested balance, whichever is less, and home purchase loans get a longer repayment window than other plan loans.

Which Retirement Accounts Let You Borrow for a Home

Federal law permits loans from individual-account plans: 401(k), 403(b), and some 457(b) plans. Whether your specific plan actually offers loans is up to your employer, who writes the rules into the plan document. Some employers do not allow loans at all. Your Summary Plan Description or a call to the recordkeeper will tell you.¹

A traditional defined benefit pension is a different animal. It promises a monthly payment in retirement based on your salary and years of service, and there is no individual account balance to borrow against in the usual sense. The actuarial complexity of keeping the plan properly funded makes loans uncommon. A few defined benefit plans do allow them, but most participants with this type of plan will not have loan access.

IRAs do not allow loans in any form. Borrowing from your own IRA is a prohibited transaction under the tax code, which disqualifies the entire account and creates an immediate tax bill on the full balance.² There is a related but separate option for IRA holders: a first-time homebuyer can withdraw up to $10,000 from a traditional or Roth IRA without paying the 10% early withdrawal penalty. Income tax still applies to a traditional IRA withdrawal, and “first-time” means you have not owned a home in the prior two years.³

You also have to be an active employee. Most plans require full repayment when you leave, and former employees generally cannot start new loans.⁴

How Much You Can Borrow

The federal cap is the lesser of $50,000 or the greater of half your vested balance or $10,000.⁵

The $10,000 floor matters when your balance is small. A $15,000 vested balance would normally cap you at $7,500, but the floor lifts that to $10,000. You still cannot borrow more than you actually have, so a $6,000 balance means a $6,000 maximum.

The $50,000 ceiling has a reduction that catches people off guard. If you had any outstanding plan loans during the 12 months before your new loan, the $50,000 is reduced by the difference between your highest balance during that period and your current balance. Borrowed $25,000 last year, paid it down to $15,000, want another loan? The cap drops to $40,000, reduced by the $10,000 gap between the old high and the current balance.⁵

Federal law does not limit how many loans you can carry at once. That is left to the plan document. Some plans allow one loan at a time, others two or more, and some treat a general-purpose loan and a home purchase loan as separate slots.⁶

The Longer Repayment Term for Home Purchase Loans

Standard plan loans must be repaid within five years. Loans used to buy a primary residence are the exception. The tax code exempts home purchase loans from that five-year limit, and plan sponsors set their own extended terms, often 10, 15, or even 20 years.⁵ The exact term depends on your plan.

Whatever the term, payments must follow a level amortization schedule with installments at least quarterly.⁵ In practice, nearly every employer sets up automatic payroll deductions, which come out in after-tax dollars.

Interest Rate and the Double-Taxation Catch

The IRS requires the interest rate to be “reasonable,” meaning comparable to what a bank would charge on a similarly secured loan.⁷ Most administrators set the rate at prime plus one percentage point, fixed for the life of the loan.

You are paying the interest to yourself. Principal and interest both go back into your own account. That sounds like free money and it is not quite. You repay with after-tax dollars, and when you eventually withdraw those funds in retirement, income tax hits again. The interest portion effectively gets taxed twice. On a five-year loan the impact is minor. On a 15- or 20-year home purchase loan the doubly taxed interest adds up.

Applying for the Loan

Most recordkeepers let you start the process through an online portal. You will need the requested amount and, for a home purchase loan, documentation showing you are buying a primary residence, usually a signed purchase agreement or sales contract.⁸ Plans without a digital portal use a mailed application.

Recordkeepers commonly charge an origination fee, a processing fee, or both, and some add an ongoing maintenance fee for tracking repayments. These come directly out of your account.⁹ Ask for the fee schedule before you apply. Approval and disbursement usually take from a few business days up to a couple of weeks.

Spousal Consent

If your plan is subject to federal survivor annuity rules, your spouse must sign a written consent form before approval. The requirement comes from the Retirement Equity Act of 1984, which protects a spouse’s future retirement benefits.¹⁰ The signature must be witnessed by a plan representative or a notary. Without the notarized consent, the administrator will reject the application.

Not every plan triggers this. Most 401(k) plans that automatically pay the full account balance to a surviving spouse can waive the annuity rules. Defined benefit pensions and money purchase plans almost always require spousal consent. Your plan documents will say which category applies.

The Job-Change Trap

This is where most people get burned. If you leave your employer with a loan outstanding, the plan typically requires immediate repayment. If you cannot pay the balance, the plan offsets your account by the loan amount. That offset is treated as an actual distribution, reported on Form 1099-R.¹¹

There is one escape hatch. When the offset happens because you left your job or the plan terminated, rather than because you simply stopped paying, it counts as a Qualified Plan Loan Offset. You can roll the offset amount into an IRA or another employer plan and undo the tax hit. The deadline is your tax return due date, including extensions, for the year of the offset.¹¹ Miss it and the offset becomes taxable income. If you are under 59½, the 10% early withdrawal penalty stacks on top.

Think this through before borrowing. If there is any chance you might change jobs in the next few years, a plan loan puts you in the position of needing to come up with the balance in cash at exactly the moment you may be dealing with other transition costs.

What Default Looks Like

Miss a scheduled payment while still employed and the plan gives you a cure period. It runs through the last day of the calendar quarter following the quarter the payment was due.¹²

Fail to catch up by the end of the cure period and the entire outstanding balance, including accrued interest, becomes a deemed distribution. The plan reports it as taxable income on Form 1099-R, and you owe income tax on the full amount. Under 59½, the 10% early withdrawal penalty applies too.¹² A deemed distribution from a missed-payment default does not qualify for the extended rollover deadline that a job-loss offset gets. Tax is settled when you file for that year.

Effect on Your Mortgage Application

If the plan loan is funding a down payment, the mortgage lender will ask for documentation. Expect to hand over the loan agreement showing the amount and repayment terms, along with proof that the funds landed in your bank account so the lender can trace the source.

Most conventional underwriters do not count 401(k) loan repayments as a monthly debt for debt-to-income purposes, since the loan is secured against your own assets. Fannie Mae’s selling guide does not list retirement plan loan payments among the required monthly obligations for DTI.¹³ Some lenders apply stricter overlays and do count the payment. Ask your loan officer directly before you assume it will not affect your qualification.

Loan or Hardship Withdrawal

Some plans offer hardship withdrawals as an alternative to loans for buying a primary residence. The differences matter. A plan loan is not taxed as long as you follow the repayment schedule, and the money goes back into your own account. A hardship withdrawal is permanent. The money comes out, you owe income tax, you may owe the 10% penalty if you are under 59½, and you never replenish the retirement account.¹⁴

A loan is almost always the better choice if the plan offers both. The one scenario where a hardship withdrawal might make sense is if you are confident you cannot maintain loan repayments, since a default converts the loan into a taxable event anyway. Even then, you lose the ability to rebuild.

The Real Cost

The biggest cost of a plan loan is not the interest rate. It is the investment returns you forfeit while the money sits outside the market. If your account would have earned 7% to 8% annually and your loan charges 9% or 10% in interest that flows back to your account, on paper the math looks close to breakeven. It rarely works out that cleanly. The borrowed money stops compounding entirely during the loan period, and on a 15-year home purchase loan the gap can represent tens of thousands of dollars in lost retirement wealth.

Add the double-taxation issue on interest. Short-term, negligible. Over a long home purchase loan with years of interest payments, the cumulative effect is real, if modest compared to the lost-growth problem.

None of this makes borrowing from your plan always a bad idea. If the alternative is a higher-interest personal loan, paying private mortgage insurance on a smaller down payment, or draining a taxable savings account that would otherwise be your emergency fund, a plan loan can be the least-bad option. Go in with clear numbers. Model your retirement balance with the loan and without it, factor in whatever you save on mortgage costs by putting more down, and decide with both sides of the ledger in front of you.

1
Internal Revenue Service. Retirement Plans FAQs Regarding Loans
2
Office of the Law Revision Counsel. 26 USC 4975 – Tax on Prohibited Transactions
3
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
4
Internal Revenue Service. Considering a Loan From Your 401(k) Plan
5
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
6
Internal Revenue Service. Borrowing Limits for Participants With Multiple Plan Loans
7
Internal Revenue Service. 401(k) Plan Fix-It Guide – Participant Loans Don’t Conform to the Requirements of the Plan Document and IRC Section 72(p)
8
Empower. Loan Administration
9
U.S. Department of Labor. 401(k) Plan Fee Disclosure Form
10
Social Security Administration. The Retirement Equity Act of 1984: A Review
11
Internal Revenue Service. Plan Loan Offsets
12
Internal Revenue Service. Issue Snapshot – Plan Loan Cure Period
13
Fannie Mae. Debt-to-Income Ratios
14
Internal Revenue Service. Hardships, Early Withdrawals and Loans