You can use retirement funds to buy a house, and federal law gives you three main paths: a penalty-free IRA withdrawal of up to $10,000 for a first home, a loan from your 401(k), or, in some plans, a 401(k) hardship withdrawal. Each carries a different tax bill and a different long-term cost to your savings, so the right choice depends less on which account has the biggest balance and more on which rules you can live with.
The $10,000 IRA First-Time Homebuyer Exception
Traditional IRA owners get a specific carve-out. You can withdraw up to $10,000 over your lifetime without the usual 10% early withdrawal penalty as long as the money goes toward buying, building, or rebuilding a first home. The cap is per person, so a married couple pulling from separate IRAs can reach $20,000 combined.1Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
“First-time homebuyer” is looser than it sounds. You qualify as long as neither you nor your spouse has owned a principal residence in the two years before the purchase date. The funds can also go toward a first home for a child, grandchild, or parent.1Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
You have 120 days from the distribution to spend the money. Eligible costs cover the purchase price along with normal settlement, financing, and closing costs.2Internal Revenue Service. Publication 590-B, Distributions From Individual Retirement Arrangements (IRAs) The 10% penalty is waived, but the withdrawal still counts as taxable income for the year, which can push you into a higher bracket.
This exception applies only to IRAs. It does not extend to 401(k) plans, 403(b) plans, or other employer-sponsored accounts.3Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
Roth IRAs Follow a Different Order
Roth accounts give you more room because you already paid tax on the contributions. Distributions come out in a set order: regular contributions first, then conversions, then earnings.4eCFR. 26 CFR 1.408A-6 – Distributions Most Roth owners can pull a meaningful amount tax-free and penalty-free at any age simply by staying within their contribution total.
The homebuyer exception only matters once you reach earnings. At that point, up to $10,000 in earnings can come out penalty-free under the same first-home rules, though income tax still applies to the earnings portion if the account has been open less than five years.2Internal Revenue Service. Publication 590-B, Distributions From Individual Retirement Arrangements (IRAs)
Borrowing From Your 401(k)
If your plan permits loans, you can borrow the lesser of $50,000 or 50% of your vested account balance. Where 50% of the vested balance is under $10,000, some plans allow you to borrow up to $10,000.5Internal Revenue Service. Retirement Topics – Plan Loans
A loan is not a taxable event. You repay yourself through payroll deductions, and the interest lands back in your own account. Standard 401(k) loans must be repaid within five years, but loans used to purchase a primary residence can extend past that; the exact term depends on the plan.5Internal Revenue Service. Retirement Topics – Plan Loans Payments have to be made at least quarterly. Falling behind converts the outstanding balance into a taxable distribution, plus the 10% penalty if you’re under 59½.
The appeal is real: no income tax, no penalty, money that eventually comes back to you. The cost is that the borrowed amount sits outside the market while it’s in your house, and any growth it would have earned is gone.
What Happens If You Leave the Job
This is where 401(k) loans get risky for homebuyers. If you quit, are laid off, or otherwise separate from your employer with a loan still outstanding, the balance is generally treated as a distribution. Your former employer reports it on Form 1099-R, and you owe income tax plus the 10% penalty if you’re under 59½.5Internal Revenue Service. Retirement Topics – Plan Loans
There is one escape: you can roll the outstanding loan balance into an IRA or another eligible retirement plan by the due date of that year’s federal tax return, including extensions.6Internal Revenue Service. Plan Loan Offsets With extensions, that typically runs to mid-October. But you need the cash to fund the rollover, which is difficult when you just spent your 401(k) buying a house. If your job feels shaky or you’re eyeing a move, factor that in before borrowing.
401(k) Hardship Withdrawals
Some plans allow hardship withdrawals for a principal-residence purchase. Unlike a loan, this money is permanent: it never goes back into your account.7Internal Revenue Service. Retirement Topics – Hardship Distributions
The IRS treats a home purchase as an automatic qualifying hardship under its safe harbor rules, but mortgage payments themselves don’t count. The amount is capped at what you actually need for the down payment and closing costs, plus enough to cover the tax the withdrawal will trigger. Your plan administrator will want documentation of the purchase price and the cash needed to close.7Internal Revenue Service. Retirement Topics – Hardship Distributions
One change worth knowing: since 2020, you are no longer required to suspend 401(k) contributions after a hardship withdrawal. The old six-month freeze was eliminated by updated IRS regulations.8Internal Revenue Service. Retirement Plans FAQs Regarding Hardship Distributions If your plan documents haven’t been updated, though, the old restriction may still apply in practice.
The critical point on hardship withdrawals: there is no first-time homebuyer exception for 401(k) plans. A hardship withdrawal for a home purchase gets hit with regular income tax and the 10% early withdrawal penalty if you’re under 59½.
Your Plan May Not Offer Loans or Hardship Withdrawals
Employers are not required to include loan or hardship provisions in their 401(k) plans. These are optional features.9Internal Revenue Service. Retirement Plans FAQs Regarding Loans Some plans offer loans but not hardship withdrawals. Some offer neither. Check your summary plan description or ask HR before you build a down-payment plan around either option.10Internal Revenue Service. Hardships, Early Withdrawals and Loans If your plan doesn’t offer them, your only 401(k) access would be a full separation from service, which defeats the purpose for most buyers.
Withholding and the Tax Bill You’ll Actually See
Every dollar out of a traditional IRA or pre-tax 401(k) gets added to your gross income for the year. The federal rate depends on your total income and filing status, and most states with an income tax will take their share as well. The 10% penalty under Section 72(t) applies to anyone under 59½ unless a specific exception fits, which for a home purchase means the IRA route.1Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
Your plan will withhold federal tax before sending the funds. Rollover-eligible distributions paid to you carry a mandatory 20% withholding.11Internal Revenue Service. 401(k) Resource Guide – Plan Participants – General Distribution Rules Hardship withdrawals are not rollover-eligible; the default there is 10%, but you can elect a different rate or opt out using Form W-4R. Withholding is only a prepayment; your final bill at filing can be higher, particularly once the 10% penalty is added on a hardship distribution.
You Can’t Buy a Home to Live In Through a Self-Directed IRA
If you have a self-directed IRA, you cannot use it to buy a house you’ll occupy. The IRS specifically lists buying property for personal use with IRA funds as a prohibited transaction.12Internal Revenue Service. Retirement Topics – Prohibited Transactions
The penalty for getting this wrong is not small. If you or a disqualified person (spouse, child, grandchild, or parent) uses IRA-owned property personally, the entire IRA loses its tax-advantaged status as of January 1 of the year the violation occurred. The full balance is treated as distributed, meaning income tax on the whole account and potentially the 10% penalty on top.12Internal Revenue Service. Retirement Topics – Prohibited Transactions A self-directed IRA can hold real estate as an investment, such as a rental, but you and close family cannot live in it, vacation in it, or use it personally.
The Long-Term Cost
The tax hit is the cost you see immediately. The one you don’t see is decades of compound growth on the money you pulled out. A $10,000 withdrawal at age 35, growing at a conservative 4% a year, would have reached roughly $33,700 by age 66. At stock-market averages, the figure is materially higher. The withdrawal doesn’t just leave your account today; it leaves every year of growth between now and retirement.
A 401(k) loan blunts this because you repay yourself, but even then the borrowed cash sits outside the market while it’s in your home. If the market climbs 15% during a year your money is out, that gain is gone. On a $40,000 or $50,000 loan carried for several years, the drag can show up clearly two decades later.
None of this makes retirement funds off-limits for a down payment. Homeownership builds equity of its own. But run the numbers through a retirement calculator before you commit, and treat retirement money as a last option rather than the first place you look.
Documents, Spousal Consent, and Timing
To release funds, plan administrators typically want a signed purchase agreement showing the property address, price, and closing date; the plan’s own loan application or hardship request form identifying the reason as a principal residence purchase; and, for hardship withdrawals, documentation of the down payment and closing costs and that you can’t cover them from other resources.
If you’re married and your plan is subject to ERISA’s joint and survivor annuity rules, your spouse must consent in writing before your account balance can secure a loan. Consent has to be obtained within 90 days before the loan is secured, though many plans use a 180-day window under IRS guidance.13Internal Revenue Service. Issue Snapshot – Spousal Consent Period to Use an Accrued Benefit as Security for Loans No signature, no loan. Raise this early with your plan administrator if it might be a sticking point.
Most providers accept requests through an online portal, though some still require wet signatures on specific forms. Disbursement generally takes three to ten business days after approval, by direct deposit or paper check. When you’re syncing this to a closing date, build in cushion. Hardship withdrawals in particular can pick up extra review time. Let your lender and escrow agent know where the money is coming from so they can plan around it.