You can withdraw from most retirement accounts to buy a home, but the rules, taxes, and long-term costs differ sharply by account type
The main retirement accounts — 401(k)s, IRAs, and Roth IRAs — each have different rules about taking money out early to purchase a home. A 401(k) loan lets you borrow from your own balance and repay it with interest. Traditional and Roth IRAs allow a one-time withdrawal of up to $35,000 for first-time homebuyers, with no early-withdrawal penalty, though traditional IRA withdrawals are taxed as income. Roth IRAs let you withdraw contributions (the money you put in) anytime tax-free, but earnings come out taxed and penalized unless you meet strict conditions. Each path has different tax consequences, repayment terms, and effects on your retirement savings growth.
The choice depends on your account balance, how much you need, your current tax bracket, and how many years until retirement. A 401(k) loan preserves your savings but requires you to repay it or face taxes and penalties if you leave your job. An IRA withdrawal is permanent — the money is gone and cannot be replaced in the same way. Understanding the rules for each account type before you withdraw is essential, because the tax bill and lost growth can be substantial.
Key Takeaways
- 401(k) loans let you borrow your own money and repay it, but if you leave your job the loan may become due when ready or be treated as a taxable withdrawal.
- Traditional IRA first-time homebuyer withdrawals of up to $35,000 avoid the 10% early-withdrawal penalty but are taxed as ordinary income in the year you withdraw.
- Roth IRA contributions can be withdrawn anytime tax-free, but earnings withdrawals before age 59½ are taxed and penalized unless you meet an exception.
- Money withdrawn from retirement accounts is gone permanently and cannot earn investment growth for the rest of your retirement.
- The tax bill from a large IRA withdrawal can push you into a higher tax bracket and affect Medicare premiums, Social Security taxation, and other benefits.
401(k) loans: borrowing from your own account
A 401(k) loan lets you borrow money from your account balance and repay it over time, usually three to five years. You pay yourself back with interest — the interest rate is typically the prime rate plus 1%, which varies but is usually lower than a mortgage or home equity loan. The loan does not show up on your credit report, and the repayment does not affect your credit score. You keep the borrowed amount invested in your account, so the rest of your balance continues to grow.
The catch is what happens if you leave your job. Most plans require you to repay the full loan balance within 60 to 90 days of separation. If you cannot repay it, the unpaid balance is treated as a taxable withdrawal, and you owe income tax plus a 10% early-withdrawal penalty if you are under 59½. Some plans allow you to keep repaying even after you leave, but this is less common. Before you take a 401(k) loan, ask your plan administrator in writing what happens to the loan if you change jobs.
A 401(k) loan also reduces the amount of your balance that is invested and earning returns. If you borrow $50,000 and the market rises 8% that year, you miss out on $4,000 in growth on that $50,000. Over 20 years to retirement, that lost growth compounds significantly.
Traditional IRA first-time homebuyer withdrawals
The IRS allows a one-time withdrawal of up to $35,000 from a traditional IRA for a first-time homebuyer, with no 10% early-withdrawal penalty. "First-time homebuyer" means you have not owned a home in the past two years — it does not mean you are buying your first home ever. You can use the money for the down payment, closing costs, or other home-purchase expenses.
The withdrawal is still taxed as ordinary income in the year you take it. If you withdraw $35,000 and your other income is $50,000, your taxable income for that year is $85,000. You owe federal income tax on the full $35,000 at your marginal tax rate, which could be 22%, 24%, or higher depending on your total income. You also owe state income tax in most states. The tax bill is due when you file your return the following April.
This tax hit can have ripple effects. A large withdrawal may push you into a higher tax bracket, increase your Medicare Part B and Part D premiums, or cause more of your Social Security benefits to be taxed. Before you withdraw, use a tax calculator or speak with a tax professional to estimate your total tax bill and see whether the withdrawal makes sense in your situation.
Roth IRA withdrawals for homebuyers
Roth IRAs have two separate buckets: contributions (the money you deposited) and earnings (the investment growth). You can withdraw your contributions anytime, tax-free and penalty-free, regardless of your age. This is a major advantage over traditional IRAs. If you have contributed $100,000 over the years and your account is now worth $150,000, you can withdraw up to $100,000 with no tax or penalty.
Earnings are different. If you withdraw earnings before age 59½, you owe income tax on them plus a 10% early-withdrawal penalty — unless you meet a narrow exception. One exception is the first-time homebuyer rule: you can withdraw up to $10,000 in earnings (lifetime total) for a first-time home purchase, with no penalty, but you still owe income tax on the earnings. This is less generous than the traditional IRA rule, which allows up to $35,000 with no penalty.
The advantage of a Roth is that you can access your contributions without any tax or penalty, so if you have been saving in a Roth for many years, you may have enough in contributions alone to cover your down payment. If you need to tap earnings, the $10,000 lifetime limit and the income tax on those earnings are the trade-offs.
How the tax bill works and what it costs you
When you withdraw from a traditional IRA or take a 401(k) loan that is later treated as a withdrawal, the money is added to your other income for the year. The IRS taxes it at your marginal rate — the rate that applies to your highest dollars of income. If you are in the 22% bracket, a $35,000 withdrawal costs you roughly $7,700 in federal tax. Add state tax, and the total can be $8,500 to $10,000 or more.
Beyond the when ready tax bill, the withdrawal reduces the balance that will grow for the rest of your working years and throughout retirement. A $35,000 withdrawal at age 55, growing at 7% annually, would become roughly $240,000 by age 80. That lost growth is a real cost, even though you do not see a bill for it.
Some people offset this by saving more in the years after the withdrawal, but most do not. If you are already saving the maximum you can afford, a retirement withdrawal means you are trading future retirement income for a home purchase today. That trade-off may be worth it — homeownership has real value — but it is important to see it clearly.
Alternatives to retirement withdrawals
Before you tap retirement savings, explore other sources. A down payment information program through your state or local housing authority may offer grants or low-interest loans. The Federal Housing Administration (FHA) allows down payments as low as 3.5%, which means you need less cash upfront. Some employers offer down payment help as part of their benefits package. Family loans or gifts, if available, do not have to be repaid and do not reduce your retirement savings.
If you have a home equity line of credit (HELOC) from a previous home, that may be cheaper than a retirement withdrawal, because the interest is sometimes tax-deductible and you do not lose the growth potential of retirement savings. A personal loan or home equity loan from a bank will have a higher interest rate than a 401(k) loan but will not jeopardize your retirement account if you change jobs.
Delaying the home purchase by one or two years to save more in your regular bank account or investment account avoids the tax hit and preserves your retirement savings entirely. This is often the least costly path if your timeline allows it.
Comparing the three main paths
| Account Type | Maximum Amount | Early-Withdrawal Penalty | Income Tax | Repayment Required |
|---|---|---|---|---|
| 401(k) Loan | Usually 50% of balance, up to $50,000 | None if repaid on time | None if repaid on time | Yes, typically 3–5 years; due in full if you leave job |
| Traditional IRA (first-time buyer) | $35,000 lifetime | None | Yes, at your marginal rate | No; withdrawal is permanent |
| Roth IRA Contributions | Amount you contributed | None | None | No; withdrawal is permanent |
| Roth IRA Earnings (first-time buyer) | $10,000 lifetime | None | Yes, at your marginal rate | No; withdrawal is permanent |
Steps to take before you withdraw
First, contact your plan administrator or IRA custodian and ask for the rules in writing. For a 401(k), ask what happens to a loan if you leave your job, what the interest rate is, and what the repayment term would be. For an IRA, confirm that you meet the first-time homebuyer definition and ask whether the withdrawal will be subject to any withholding.
Second, run the numbers with a tax professional or tax software. Enter the withdrawal amount into your tax return for the year you plan to withdraw and see what your total tax bill will be. Check whether the withdrawal will affect your Medicare premiums, Social Security taxation, or other benefits. This step often reveals surprises — a $35,000 withdrawal can cost $10,000 or more in taxes and benefit changes.
Third, explore whether you can meet your down payment goal without touching retirement savings. Add up what you have in savings, what down payment information you may be able to get, and what a lower down payment (3.5% to 5%) would require. If you can avoid the withdrawal, that is usually the best outcome for your long-term retirement security.
Frequently Asked Questions
Can I withdraw from my 401(k) without penalty if I am over 55?
Yes, if you left your job in the year you turned 55 or later, you can withdraw from that employer's 401(k) without the 10% early-withdrawal penalty. This is called the "Rule of 55." However, the withdrawal is still taxed as ordinary income. This rule does not explore to IRAs or to 401(k)s from previous employers.
What if I have both a traditional IRA and a Roth IRA?
The $35,000 first-time homebuyer limit applies across all your IRAs combined, not per account. If you withdraw $20,000 from a traditional IRA and $15,000 from a Roth IRA (earnings), you have used your full $35,000 lifetime allowance. The withdrawal from the traditional IRA is taxed; the withdrawal from the Roth earnings is also taxed.
If I take a 401(k) loan and then get laid off, what happens?
Most plans require you to repay the full loan balance within 60 to 90 days of separation. If you cannot repay it, the unpaid amount is treated as a taxable withdrawal, and you owe income tax plus a 10% penalty if you are under 59½. Some plans allow extended repayment, so ask your administrator about your specific plan before you take the loan.
Will a retirement withdrawal affect my Social Security or Medicare benefits?
A large withdrawal can increase your taxable income for the year, which may cause more of your Social Security benefits to be taxed and may increase your Medicare Part B and Part D premiums. The effect depends on your total income and filing status. A tax professional can calculate the impact before you withdraw.
Can I put the money back into my retirement account after I buy the home?
No. A withdrawal from an IRA is permanent — you cannot undo it or "replace" it in the same account. A 401(k) loan must be repaid, but that repayment goes back into your 401(k) as a loan repayment, not as a new contribution. If you want to save more for retirement after a withdrawal, you can make new contributions up to the annual limit, but the withdrawn amount is gone.