Can You Withdraw From Your 401(k) to Buy a House?

Marie-Claire Hart is a senior attorney for the Sophisticated Planning Strategies team at Northwestern Mutual.

Saving for a down payment is often a hurdle to buying a home. After all, most conventional mortgages require 20 percent of the value of the home as a down payment. You may have options to put down less than 20 percent, but you’ll probably still need a large amount of cash.

With the median home price in the U.S. expected to reach more than $410,000 in 2025, the traditional 20 percent down payment could mean as much as $82,000. Even if you’re aiming for a 3.5 percent down payment, that’s still a lot of money at nearly $15,000.

To help bolster your down payment and get into a home sooner than later, you might be tempted to tap into your 401(k) for the cash. But can you? And if you can, should you?

Below, you can see the different ways you could potentially use your 401(k) savings to buy a home and the reasons you should carefully consider the limitations before taking this step. And you can get ideas for other sources of money for the down payment.

Can you use your 401(k) to buy a house?

Yes, it’s possible to access your 401(k) retirement savings to buy a house, but you should think of it as a last resort because the account is really meant for use in retirement. Withdrawing funds early may come at the expense of years’ worth of potential tax-deferred or tax-free growth. For most people, their retirement investments are a major source of income in their later years.

Using funds now might require you to save more aggressively in the future to make up for the lost funds—even risking a shortage in your retirement income needs if you can’t make up the gap. Before tapping into your 401(k), consider alternatives that could help you achieve your goal to buy a home without compromising your retirement savings.

However, if you decide to access your 401(k) funds, it may be possible to access your funds in one of two ways, each of which has drawbacks.

Making a 401(k) withdrawal to buy a house

You could take a distribution from your 401(k) to help purchase your home. You’ll need to pay income tax on any pretax dollars you withdraw. If you’re younger than 59½, it’s likely to be deemed an early withdrawal from your 401(k), and you’ll be hit with a 10 percent penalty—on top of the income taxes you’ll need to pay on your withdrawal.

In addition to the federal income tax and potential 10 percent penalty on the withdrawal, you could also owe additional federal income taxes on investment income if you make more than $250,000 as a married couple (or $200,000 as a single individual). You could also be subject to state income taxes.

If you have a Roth 401(k), you may be able to withdraw your contributions (but usually not earnings) without triggering taxes and penalties. While this lowers the tax burden and keeps more money in your pocket, it does mean forfeiting the potential for compound interest and future tax-free growth that could have happened if you left the money in your Roth 401(k) instead.

Using a 401(k) loan to buy a house

You can also take a loan from your 401(k) to make a down payment. You may be able to borrow up to $50,000 or 50 percent of the vested value of your account, whichever is less. In most cases, you’ll have five years to repay the loan (plus interest), but repayment on primary home purchases can be extended up to 10 years. You’ll also have to make regular repayments of the loan principal plus interest. Any interest you pay goes back into your account, which may help offset the impact of some of the growth you may have missed by taking your money out of the market.

Because borrowing from your 401(k) doesn’t trigger early withdrawal penalties or income taxes, this is the better option for most people who choose to tap into their retirement savings. These are other reasons that it can work for some people:

• Easy approval: Approval can be easier for a 401(k) loan than most private loans.
• Quick access: Most people can expect to receive their funds within one to two weeks.
• No impact to your credit score: Unlike traditional loans, a 401(k) loan doesn’t appear on your credit report or affect your credit score.
• Generally low interest rates: Interest rates on 401(k) loans are typically the rate set by banks (called the “prime rate”) plus 1 to 2 percent.

In addition to taxes and potential growth loss, there are more drawbacks to consider. For starters, not every 401(k) plan allows for loans, and of those that do, some may not allow you to contribute to your plan as long as you have an outstanding loan. This limits your ability to save for retirement since a 401(k) is where many people make most of their retirement contributions. Depending on how much you have saved outside of your 401(k), the borrowing limits may still not be enough to fully cover your down payment. And if you fail to repay the loan on time, leave your employer (including retiring), or the plan is shut down, you’ll have a limited time to repay the entire loan balance before it is treated as a distribution subject to income taxes and potential penalties.

Alternatives to using your 401(k) to buy a house

If you’re trying to pull together a down payment, using the money in your 401(k) isn’t your only option. Here are some other paths you should consider:

A life insurance loan

If you have a permanent life insurance policy that has accrued cash value, you may be able to take a policy loan against that cash value. Just like a 401(k) loan, you’ll need to pay back the principal plus interest, but most of the time you’ll avoid penalties and income taxes. If you don’t repay the loan before you die, the outstanding balance may reduce the death benefit paid to your loved ones and trigger a taxable event.

A loan from a friend or family member

Borrowing a down payment from someone you’re close to can be a practical solution. It’s important to have a clear and open conversation about the terms of the loan, including the repayment schedule, interest (if any), and any other conditions. Put the agreement in writing to help prevent misunderstandings and ensure that you’re on the same page. By approaching the situation with transparency and professionalism, you can maintain a strong relationship with your relative while securing the financial support you need.

A traditional IRA withdrawal

If you’re a first-time homebuyer and have money saved in a traditional IRA, you may be able to withdraw up to $10,000 (or $20,000 if you’re married filing jointly) toward a home, penalty free. While this means you won’t be charged the 10 percent early withdrawal penalty, you’ll still owe income taxes on your withdrawal. Still, this may be a better option than making an early withdrawal from your 401(k), for which you could face penalties on top of taxes. And remember that your 401(k) is meant to be money for retirement, so withdrawing from it for a home purchase should be considered carefully.

A Roth IRA withdrawal

With a Roth IRA, as mentioned above, you can make a withdrawal on contributions, without paying income tax or penalties at any time. And if you’re using the money to buy a home, you could also withdraw earnings without penalty (up to $10,000 for first time homebuyers). Again, be cautious about using money now that was intended for retirement.

HSA withdrawals

If you have money saved in your health savings account (HSA) and have recently incurred qualified medical expenses that you paid out of pocket after the HSA was established, you may be able to reimburse yourself with your HSA funds. HSA distributions for qualified medical expenses are tax-free. That cash could be used to cover or supplement your existing down payment savings.

And if you’re over 65 years old, the money in your HSA can be used for any reason without penalty. But keep in mind that you’ll still owe income taxes on the withdrawal, unless the money is used for qualified medical expenses.

How to decide what's right for you

While it may be technically possible to use your 401(k) to buy a house, that doesn't mean it's necessarily a good idea. After all, your retirement savings are for exactly that- retirement. Making an early withdrawal or taking a 401(k) loan means taking your money out of the market, where it could be growing. This could make it even more difficult to catch up on retirement savings down the road.

If you're planning for your down payment, talk with your Northwestern Mutual financial advisor. They can help you figure out how to get where you want to be by working with you on a plan that balances all of your short-term and long-term goals.