Can I take a 401k or IRA Distribution to Buy a Home?

September 25, 2026 by Charla Suaste

Finding the perfect home is exciting—until you look at the down payment. If you’re like many Americans, you might be eyeing your 401(k) or IRA and wondering, Can I just use that? While tapping your retirement savings is possible, navigating the IRS early distribution rules can be a minefield. Here is what you need to know before you make your move. 

 

What are some basic rules about withdrawing money from my qualified retirement plan?  

Before we nail down some of the finer details, such as the impact of withdrawing funds from either an IRA or 401(k) qualified retirement plan to purchase a home, let’s lay a sturdy foundation with the basic ground rules.  

First of all, it is generally easier to withdraw funds from an IRA than from a 401(k) retirement account. The reason is that 401(k) accounts are governed by specific plan terms that usually disallow distributions until certain events occur, such as the employee separating from the company, dying, becoming disabled, reaching age 59½, or having a qualified hardship withdrawal. At the same time, those with an IRA account can usually take distributions whenever they like and for any reason, as long as the funds are available. However, whether the distribution will be subject to income tax and an early distribution penalty is another story. Generally, for most qualified retirement plans, such as different types of IRAs, 401(k)s, 403(b)s, pensions, and qualified employee annuity plans, distributions taken on or after you reach age 59½ are not subject to a 10% federal early distribution penalty. Whether the distributions are subject to regular federal or state income tax will depend on the type of plan and whether you made any nondeductible (after-tax) contributions.    

 

Is there a special exception to the 10% early distribution penalty if I use the money I withdrew from my retirement plan to buy a home?  

As with just about everything related to taxes, there are exceptions to the age 59½ rule and 10% federal early distribution penalty, and one of these is the First-Time Home Purchase Exception. If you qualify, this exception will relieve you of the 10% federal early distribution penalty if you are under age 59½. It does not relieve you of any tax due on the distribution, if any.  

 

Can I use my IRA to finance my new home? 

The good news is that the First-Time Home Purchase Exception applies to qualified distributions from your IRA account. If you have not owned a home in the past two years, you are considered a first-time buyer under federal tax law. This status allows you to withdraw up to $10,000 from your traditional, Roth, SEP, or SIMPLE IRA to buy or build your first home, without incurring the 10% early withdrawal penalty. This $10,000 limit is a lifetime cap for each individual, so if you have used this exception before, you cannot use it again.  

However, while the penalty is waived, traditional IRA withdrawals are still subject to ordinary income tax.  

The funds must be used within 120 days of the withdrawal for qualified home purchase costs. The IRS also extends this exception so you can help your spouse, child, grandchild, or parent buy their first home, further increasing the potential benefits for your family. 

Something to note: When you hear the words “first home,” you are probably thinking of the very first home you purchased as an adult. However, in the IRS world, a taxpayer can have a “first home” more than once in their adult life. As stated above, as long as you have not owned a home in the past two years, you can be considered a first-time homebuyer, even if you owned a home in the past. Let’s take a look at an example.

In 2021, Peggy, who lived in Ann Arbor, Michigan, was offered her dream job in Los Angeles, California. Peggy sold her Ann Arbor home, which she had owned for the last 10 years, and headed to Los Angeles, where she rented an apartment. Even though she enjoyed her job on the West Coast, she dreamed of going back home to Michigan. In June 2024, Peggy moved back to Ann Arbor and was eager to put down roots and buy a home. To help cover the down payment for her new house, Peggy took an $8,000 distribution from her traditional IRA.  

Although Peggy was only 45, she did not have to pay the 10% early distribution penalty for taking money out of her traditional IRA before turning age 59½ when she filed her 2024 federal individual income tax return, Form 1040. While Peggy previously owned a home, she had not owned one in the last two years. Additionally, since she had never taken a prior distribution from her traditional IRA to purchase a home, the entire distribution was eligible for the penalty exception.  

What if Peggy took a $5,000 early distribution from her traditional IRA when she purchased her first home in Ann Arbor back in 2010? Because she hadn’t owned a home since 2021, Peggy still qualified for the first-time homebuyer early withdrawal penalty exception in 2024. However, because of the $10,000 lifetime cap, Peggy could claim the 10% early withdrawal penalty exception for only $5,000 of the $8,000 she withdrew from her traditional IRA. Because Peggy did not qualify for another early distribution penalty, $3,000 of the $8,000 she withdrew from her traditional IRA was subject to the 10% early distribution penalty when she filed her 2024 return. 

 

Can I use my 401(k) for financing?  

For 401(k) accounts, the rules are less flexible. Generally, the IRS does not allow penalty-free withdrawals from a 401(k) to purchase a home. Instead, you may be able to borrow from your 401(k) plan or request a hardship withdrawal if your employer’s plan permits. A 401(k) loan allows you to borrow up to $50,000 or 50% of your vested balance, whichever is less. Most 401(k) loans must be repaid within five years, and level payments must be made at least quarterly. In other words, infrequent, irregular payments are usually not possible. However, a longer term is allowed if the loan is for the purchase of a primary residence. The repayment period will depend on the rules for your 401(k). Many employers use a 10-year period for this, although some plans do offer longer repayment periods. Check with your HR department to determine what the rules are for your 401(k). No income tax or penalty applies to loans if you repay them on schedule, but failing to repay turns the balance into a taxable distribution, with penalties if you are under the age of 59½. And if you are laid off or quit your job, the loan may be treated as a distribution in the year you are no longer employed with that employer. 

If you qualify for a hardship withdrawal, the funds you withdraw are subject to income tax and, for most individuals under 59½, a 10% early withdrawal penalty applies. While buying a principal residence is a recognized hardship reason, the IRS does not waive the penalty for 401(k) withdrawals as it does for IRAs. 

 

Key Considerations When Using Retirement Funds for a Home Purchase: 

• IRA distributions up to $10,000 are penalty-free for first-time homebuyers, but are still taxable if from a traditional IRA, or any other type of IRA where you have no after-tax contributions or basis. 
• 401(k) loans are tax-free if repaid on time; hardship withdrawals are taxable, and you may incur a 10% early withdrawal penalty. 
• Early access to retirement funds can significantly impact your long-term retirement savings. 

 
It’s important to weigh both the immediate benefits of accessing retirement funds and the potential drawbacks, such as reduced retirement security and possible tax penalties. The decision to use a 401(k) or IRA for a home purchase should be made carefully, ideally after consulting a tax or financial advisor. 

 

Summary 

While IRAs can offer a clear path for first-time homebuyers to withdraw up to $10,000 penalty-free, 401(k) plans offer fewer advantages and generally require repayment of any borrowed amounts. Review IRS guidance and your plan documents to confirm eligibility and avoid unexpected tax surprises. By understanding the IRS rules and thinking ahead, you can make an informed decision about funding your home purchase.