Taking money out of a 401(k) to buy a house is possible through two very different routes: a 401(k) loan, which lets you borrow up to $50,000 from your own account and repay it with interest, or a hardship withdrawal, which permanently removes the money and triggers income taxes plus a possible 10% early withdrawal penalty. Neither option is guaranteed. Employers are not required to offer loans or hardship distributions, so confirm what your plan actually allows before you count on the funds.
Confirm What Your Plan Allows
The IRS leaves loan and hardship provisions entirely to the plan sponsor’s discretion.1Internal Revenue Service. Hardships, Early Withdrawals and Loans Your plan document and summary plan description spell out whether loans, hardship distributions, or both are available. If your plan offers neither, you have no way to access the money before you leave the employer or reach retirement age. Check with your plan administrator or your benefits portal before you build a home-buying timeline around 401(k) money.
Borrowing Through a 401(k) Loan
A 401(k) loan is the less costly way to use retirement funds for a house. You borrow from your own vested balance and repay yourself with interest, and there are no taxes or penalties as long as you stay current. The interest goes back into your own account rather than to a bank.
Federal law caps the loan at the lesser of $50,000 (reduced by your highest outstanding 401(k) loan balance during the prior 12 months) or the greater of half your vested account balance or $10,000.2Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts That $10,000 floor matters if your balance is modest: someone with a $15,000 vested balance can still borrow up to $10,000 under the statute, even though half the balance would only be $7,500. Individual plans can impose stricter limits.
Most 401(k) loans must be repaid within five years, but federal law waives that limit for loans used to buy a principal residence, without setting a replacement maximum.2Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Many plans allow 10 to 15 years for home loans, and some extend to 25 or 30 years to mirror a conventional mortgage schedule. Repayments happen through payroll deductions or scheduled installments.
Plan administrators typically set the interest rate at the prime rate plus 1% to 2%. With the prime rate at 6.75% as of early 2026, that puts most 401(k) loan rates between 7.75% and 8.75%.3Federal Reserve Bank of St. Louis. Bank Prime Loan Rate (MPRIME) The Department of Labor regulation simply requires a “reasonable” rate comparable to what a commercial lender would charge for a similar loan.
Taking a Hardship Withdrawal
A hardship withdrawal is fundamentally different. The money leaves your account permanently, it stops compounding, and you owe income taxes on the full amount. Federal regulations list costs directly related to purchasing a principal residence as a qualifying hardship, but they explicitly exclude ongoing mortgage payments.4eCFR. 26 CFR 1.401(k)-1 – Certain Cash or Deferred Arrangements The withdrawal covers the down payment, closing costs, and similar acquisition expenses only.
To qualify, you must show an “immediate and heavy financial need” you can’t meet through other reasonably available resources. Most plans use the “deemed necessary” standard, so you self-certify with a written statement rather than opening your finances for a full audit. You confirm in writing that you don’t have sufficient cash or liquid assets, and the plan administrator accepts that unless they have actual knowledge it’s false.5Internal Revenue Service. Retirement Plans FAQs Regarding Hardship Distributions You aren’t required to take a 401(k) loan first if doing so would disqualify you from getting the mortgage you need.
The withdrawal amount cannot exceed the actual cost of the purchase plus any taxes you’ll owe on the distribution.6Internal Revenue Service. Retirement Topics – Hardship Distributions
Taxes and Penalties
A 401(k) loan has no tax consequences as long as you repay on schedule. The borrowed money isn’t income, and there’s no early withdrawal penalty. One quirk: the interest you pay back into your account will be taxed a second time when you withdraw it in retirement, because those interest payments are made with after-tax dollars but the whole account gets taxed at distribution.
Hardship withdrawals are a different story. The full amount counts as ordinary income for the year you take it, and the plan administrator withholds federal income tax before releasing the funds.7Internal Revenue Service. 401(k) Resource Guide – Plan Participants – General Distribution Rules If you’re under 59½, you’ll also owe a 10% early withdrawal penalty on top of the income tax.8Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
The math gets painful fast. On a $30,000 hardship withdrawal, withholding shrinks your check before you receive it, and the 10% penalty adds another $3,000 at tax time. Depending on your tax bracket, the combined hit can consume 30% to 40% of the withdrawal. To net $30,000 for a down payment, you may need to pull $40,000 or more from the account.
Roth 401(k) Withdrawals
If your contributions went into a Roth 401(k), you already paid income tax on those dollars. A hardship distribution from a Roth 401(k) is split proportionally between contributions and earnings. The contribution portion comes out without additional income tax; the earnings portion is taxable and subject to the 10% penalty if you’re under 59½. A Roth hardship withdrawal costs less than a traditional one, but it still permanently reduces your retirement balance.
What Happens If You Leave Your Job
This is where people get blindsided. When you separate from your employer, the plan can require you to repay the full outstanding loan balance. If you can’t pay, the remaining balance is treated as a distribution and reported on Form 1099-R, triggering income taxes and the 10% early withdrawal penalty if you’re under 59½.9Internal Revenue Service. Retirement Topics – Loans
There is an escape hatch. If the loan qualifies as a “qualified plan loan offset” because you left your job or the plan terminated, you can roll the outstanding balance into an IRA or another eligible retirement plan by your tax filing deadline, including extensions.10Internal Revenue Service. Plan Loan Offsets That typically means mid-October of the following year if you file for an extension. Rolling over the offset avoids the tax hit, but you need cash to deposit into the IRA, since the original loan funds already went into the house.
If there’s any chance you’ll change jobs in the next few years, factor this into the decision. A 401(k) loan can quietly become a taxable distribution the moment your employment situation changes.
The IRA First-Time Homebuyer Exception Does Not Apply
One penalty break catches people off guard: it exists for IRAs, not for 401(k) plans. Up to $10,000 withdrawn from a traditional IRA for a first-time home purchase avoids the 10% early withdrawal penalty under IRC Section 72(t)(2)(F). You still owe income tax, but the penalty is waived. The exception applies to IRAs, SEP-IRAs, and SIMPLE IRAs. It does not apply to 401(k) plans or other qualified employer plans.8Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
The $10,000 is a lifetime cap, not annual. “First-time homebuyer” is defined loosely: it covers anyone who hasn’t owned a principal residence in the prior two years. If you have both a 401(k) and a traditional IRA and you’re buying your first home, pulling the first $10,000 from the IRA rather than the 401(k) saves the 10% penalty on that slice. For anything above $10,000, a 401(k) loan is almost always cheaper than a withdrawal from either account.
Spousal Consent
If you’re married, your spouse may need to sign off on a 401(k) loan. Some qualified plans require written spousal consent for any loan over $5,000. Most 401(k) plans are structured as profit-sharing plans, though, and can skip spousal consent if all three of these are true: the plan pays the full death benefit to the surviving spouse by default, the plan doesn’t offer a life annuity payout, and the plan wasn’t funded by a transfer from a plan required to provide a survivor annuity.9Internal Revenue Service. Retirement Topics – Loans Many modern 401(k) plans meet these conditions and don’t require your spouse’s signature. Check your plan document to confirm.
How to Request the Funds
Start with your summary plan description. It identifies the plan administrator and lays out the specific procedures. Most large plans handle everything through an online benefits portal; some still accept mailed or faxed forms.
For a loan, you typically select the loan option in the portal, specify the amount, and choose a repayment term. The process is relatively streamlined because you’re borrowing from yourself and the plan has clear authority to approve the loan within statutory limits.
For a hardship withdrawal, gather these documents before you start:
- A signed purchase agreement showing the purchase price, down payment, and closing date
- The full legal address of the home you’re buying
- A written self-certification that you lack sufficient cash or liquid assets to cover the expense
The amount you request must match the financial obligations in your purchase agreement. Overstating creates compliance problems for the administrator; understating leaves you short at closing. Include any taxes you’ll owe on the distribution in the total, since the regulations allow you to withdraw enough to cover that impact.
Once submitted, disbursement timelines vary, but most plans distribute funds within a few business days to two weeks after approval. You can usually choose between a mailed check and an electronic transfer. If your closing date is tight, start early. Incomplete paperwork and missing signatures are the most common cause of delays.
The Long-Term Cost to Your Retirement
Every dollar you pull from a 401(k) loses decades of compound growth. A $30,000 withdrawal at age 35, assuming a 7% average annual return, would have grown to roughly $228,000 by age 65. That’s the real price, not just the $30,000 plus taxes.
A loan is less destructive because you repay it with interest, but your borrowed balance sits in cash or a stable value fund during the loan period rather than staying in your portfolio’s growth allocation. In a strong market, the opportunity cost of a loan can be substantial even though you repaid every dollar.
None of this means you should never use your 401(k) for a home purchase. Homeownership builds equity, and in some markets the math works. But go in with clear eyes about what the loan or withdrawal actually costs over 20 or 30 years, not just what it costs at tax time. If you can cover the down payment through other savings, gift funds, or a lower-down-payment mortgage program, your 65-year-old self will thank you.