Using Your 401(k) to Pay for a Home Down Payment
How to borrow from or withdraw from your 401(k) for a down payment
You can use money in your 401(k) in two ways to fund a down payment: borrow against it through a loan, or withdraw it early under specific rules. A 401(k) loan lets you borrow your own money and repay it to yourself with interest over a set schedule—usually five years, though longer terms exist for home purchases in some plans. An early withdrawal (called a distribution) lets you take the money out permanently, but you will owe income tax on it and possibly a 10% penalty unless you meet an exception.
The choice between borrowing and withdrawing depends on your plan's rules, your tax bracket, and whether you can afford to repay a loan while still saving for closing costs and moving expenses. Neither option is risk-free: a loan ties up your retirement savings and creates a monthly payment; a withdrawal shrinks your nest egg and triggers taxes you may not have budgeted for.
Key Takeaways
- A 401(k) loan lets you borrow up to 50% of your vested balance (or $50,000, whichever is less) and repay it over five years, with no tax penalty if you repay on time.
- An early withdrawal is permanent and triggers income tax plus a 10% penalty unless you meet an exception—the most common being the first-time homebuyer exception under certain circumstances.
- If you leave your job, any outstanding 401(k) loan usually must be repaid within 60 days or it becomes a taxable withdrawal.
- Your plan document controls what is allowed; not all 401(k)s permit loans or early withdrawals, so you must check with your plan administrator first.
- Borrowing from your 401(k) reduces the balance that grows tax-deferred, which can cost you significantly in retirement earnings over time.
How a 401(k) loan works and what it costs
When you take a 401(k) loan, you borrow from your own account balance. The plan administrator sets the interest rate (usually prime rate plus 1 to 2 percentage points) and you repay it through payroll deductions. The interest you pay goes back into your own account, not to a bank, but the loan still has a real cost: the money you borrowed stops growing tax-deferred while it sits as a loan balance instead of invested assets.
The standard repayment term is five years for a general loan, but many plans allow up to 15 years if the loan is specifically for a primary residence down payment. You can borrow up to 50% of your vested account balance or $50,000, whichever is less. If your balance is $100,000 and fully vested, you can borrow up to $50,000. If your balance is $80,000, you can borrow up to $40,000.
The critical risk: if you leave your job, the loan is typically due in full within 60 days. If you cannot repay it, the IRS treats the unpaid balance as a distribution, which means you owe income tax on it plus the 10% early withdrawal penalty (unless an exception applies). This can turn a $30,000 loan into a $12,000+ tax bill if you are in the 24% tax bracket and cannot repay before the deadline.
Early withdrawal rules and the first-time homebuyer exception
Normally, withdrawing from a 401(k) before age 59½ triggers a 10% penalty plus income tax on the full amount. However, the IRS allows a one-time exception for first-time homebuyers: you can withdraw up to $10,000 lifetime from a traditional or Roth 401(k) without the 10% penalty. You still owe income tax on the withdrawal from a traditional 401(k), but not the penalty.
The "first-time homebuyer" definition is broader than it sounds: you may have access to if you have not owned a home in the past two years. You must use the money within 120 days of withdrawal to pay may have access to acquisition costs—down payment, closing costs, or construction of a primary residence. If you do not use it for those purposes within the window, the IRS may assess the penalty retroactively.
A Roth 401(k) withdrawal is more favorable: you can withdraw your contributions (the money you put in) tax-free and penalty-free at any time, and the $10,000 first-time homebuyer exception applies to earnings as well. However, Roth 401(k)s are less common than traditional 401(k)s, and your plan must offer one.
Comparing the loan versus withdrawal decision
A loan preserves your retirement account and avoids immediate taxes, but it creates a monthly payment and reduces your account growth. A withdrawal gives you the full amount now but shrinks your retirement savings permanently and triggers a tax bill. The math depends on your tax bracket, how long you stay at your job, and how much you expect that money to grow.
The loan route makes sense if you plan to stay at your current job for at least five years and can afford the monthly repayment without straining your budget. The withdrawal route makes sense if you have limited retirement savings, expect to leave your job soon, or are in a low tax bracket this year. Neither choice is permanent—you can always pursue other down payment sources if either option feels too risky.
| Feature | 401(k) Loan | Early Withdrawal |
|---|---|---|
| Amount available | Up to 50% of vested balance, max $50,000 | Any amount, but $10,000 penalty-free for first-time homebuyers |
| Immediate tax | None if repaid on schedule | Income tax on full amount (traditional); none on contributions (Roth) |
| 10% penalty | No, if repaid on time | Yes, unless first-time homebuyer exception applies |
| Monthly payment | Yes, usually 5–15 years | No |
| Risk if you leave your job | Loan due in 60 days or becomes taxable withdrawal | Already withdrawn; no additional risk |
| Account growth impact | Borrowed amount stops growing until repaid | Withdrawn amount is gone permanently |
What to check with your plan administrator before you decide
Not all 401(k) plans allow loans or early withdrawals. Your employer's plan document controls what is permitted. Before you assume you can borrow or withdraw, contact your plan administrator (usually the HR or benefits department) and ask: Does the plan allow 401(k) loans? If so, what is the interest rate and maximum repayment term? Does the plan allow early withdrawals? If so, are there any restrictions or blackout periods?
You will also need to know your vested balance—the portion of your account that legally belongs to you. If you have been at your job less than a few years, you may not be fully vested, which reduces how much you can borrow. Your most recent 401(k) statement should show your vested balance, or you can ask your plan administrator.
Some plans also impose a loan origination fee or annual maintenance fee, which reduces the net amount you receive. Ask about all fees upfront so you can factor them into your decision.
Tax implications and what to expect on your tax return
If you take a 401(k) loan and repay it on schedule, there is no tax consequence—the repayment is simply moving your own money back into your account. However, if the loan is not repaid (because you left your job and missed the 60-day deadline, for example), the unpaid balance is treated as a distribution and you owe income tax on it plus the 10% penalty.
If you take an early withdrawal, you will receive a Form 1099-R from your plan administrator showing the distribution amount. If you claimed the first-time homebuyer exception, you still owe income tax on the withdrawal (from a traditional 401(k)), but the 10% penalty does not apply. You report this on your tax return when you file. If you did not meet the exception or used the money for something other than a home purchase, you owe both the tax and the penalty.
The income tax on a withdrawal is calculated at your marginal tax rate for that year. If you withdraw $20,000 and you are in the 22% tax bracket, you will owe roughly $4,400 in federal income tax, plus any state income tax. Some people choose to have taxes withheld from the distribution itself, which reduces the cash you receive but avoids a surprise bill at tax time.
Alternatives to using your 401(k) for a down payment
Before you tap your retirement account, consider other sources: a down payment assistance program through your city or county, a gift from a family member (which does not need to be repaid and does not count as income for mortgage purposes), or a lower down payment option like an FHA loan (which accepts 3.5% down) or a conventional loan with private mortgage insurance (which accepts 3% down). These options preserve your retirement savings and avoid the tax and repayment risks of a 401(k) withdrawal or loan.
If you have a Roth IRA (not a 401(k)), the rules are more flexible: you can withdraw your contributions at any time without penalty or tax, which may be a simpler source for a down payment if you have one. A traditional IRA also allows a one-time $10,000 first-time homebuyer withdrawal without the 10% penalty, though you still owe income tax.
Frequently Asked Questions
Can I borrow from my 401(k) if I am self-employed or have a solo 401(k)?
Yes, if your solo 401(k) plan document permits loans. Solo 401(k)s often allow loans, but the rules vary by plan. You must check your plan document or contact your plan provider. The loan limits and repayment terms are the same as for employer plans.
What happens to my 401(k) loan if I get laid off?
The loan becomes due in full within 60 days. If you cannot repay it, the unpaid balance is treated as a taxable distribution, and you owe income tax plus the 10% early withdrawal penalty (unless an exception applies). This can create a large unexpected tax bill.
Can I take a 401(k) withdrawal and a loan at the same time?
Yes. You can withdraw up to $10,000 under the first-time homebuyer exception and also take a loan for additional funds, as long as your plan permits both and your balance is large enough. However, both reduce your retirement savings, so consider the combined impact.
Do I have to pay back a 401(k) loan if I roll my 401(k) into an IRA?
Yes. If you roll your 401(k) into an IRA, any outstanding loan must be repaid immediately or it becomes a taxable distribution. You cannot simply roll a loan balance into an IRA; the cash must be repaid first.
Is the interest I pay on a 401(k) loan tax-deductible?
No. Unlike mortgage interest or student loan interest, the interest you pay on a 401(k) loan is not tax-deductible. However, the interest does go back into your own account, so it is not a total loss.