Yes, if you have a governmental 457(b) plan and its plan document permits loans, you can borrow from your 457 to buy a house. Federal tax law caps the loan at $50,000 or a share of your vested balance, and because the money is going toward a primary residence, your plan can give you far longer than the standard five years to pay it back. Two conditions decide whether this is available to you at all: your plan has to be governmental (not the “Top Hat” kind offered by tax-exempt employers), and your employer has to have written a loan provision into the plan.
Which 457 Plans Allow Loans
The dividing line is governmental versus non-governmental. Governmental 457(b) plans are sponsored by state and local government employers.1Internal Revenue Service. IRC 457(b) Deferred Compensation Plans Federal law requires these plans to hold assets in trust for the exclusive benefit of participants, which is what makes a loan mechanically possible.2Office of the Law Revision Counsel. 26 U.S. Code 457 The IRS lists 457(b) plans among plan types that may offer loans.3Internal Revenue Service. Retirement Topics – Loans
Non-governmental 457(b) plans, sometimes called “Top Hat” plans, are offered by tax-exempt organizations to a select group of management or highly compensated employees.4Internal Revenue Service. Non-Governmental 457(b) Deferred Compensation Plans The assets in these plans must remain unfunded. The money legally belongs to the employer and is exposed to its creditors in bankruptcy, so there’s no trust to borrow against. If you’re in one of these, a plan loan isn’t on the table.
You can confirm the plan type by checking your summary plan description or calling your plan’s recordkeeper. Look for language about a trust and whether the plan is described as “funded” or “unfunded.” Even in a governmental plan, the employer decides whether to include a loan feature, so the plan document has the final word.
How Much You Can Borrow
Federal tax law sets the ceiling. Under 26 U.S.C. § 72(p), the maximum loan that avoids being treated as a taxable distribution is the lesser of $50,000 or a figure tied to your vested account balance.5Office of the Law Revision Counsel. 26 USC 72 That second figure is the greater of half your vested balance or $10,000. The $10,000 floor helps participants with smaller accounts: if your vested balance is $15,000, you can borrow up to $10,000 rather than being held to $7,500.
A few examples:
- Vested balance of $100,000: half is $50,000, and the cap is $50,000. Maximum loan is $50,000.
- Vested balance of $60,000: half is $30,000. Maximum loan is $30,000.
- Vested balance of $15,000: half is $7,500, but the $10,000 floor applies. Maximum loan is $10,000.
One rule catches people off guard. If you’ve had another plan loan in the past 12 months, the $50,000 cap is reduced by the difference between your highest outstanding loan balance from the plan during the prior year and your current outstanding balance when the new loan is made.6Internal Revenue Service. Retirement Plans FAQs Regarding Loans Borrow $40,000 last year, pay it down to $10,000, and your $50,000 cap on a new loan drops by the $30,000 difference, leaving you a $20,000 maximum. The rule stops participants from cycling through repeated $50,000 loans.
Your plan can impose tighter limits than the federal maximums. Some cap loans at a flat dollar amount below $50,000 or skip the $10,000 floor. The plan document controls.
Longer Repayment When the Loan Buys Your Home
General-purpose 457(b) loans must be repaid within five years with at least quarterly payments of roughly equal size, or the outstanding balance becomes a taxable distribution.6Internal Revenue Service. Retirement Plans FAQs Regarding Loans Loans used to buy a dwelling that will serve as your principal residence are exempt from that five-year deadline.7Office of the Law Revision Counsel. 26 U.S. Code 72 The statute doesn’t set a specific maximum for the extended term. The plan itself decides, and many plans offer 10, 15, or even 20-year repayment windows.
Interest rates on plan loans are typically pegged to the prime rate plus a small margin, often around one percentage point. The interest doesn’t go to a bank; it goes back into your own retirement account. Repayments run through automatic payroll deductions from your after-tax pay and continue until the balance and interest are fully repaid.3Internal Revenue Service. Retirement Topics – Loans
The principal residence exception covers buying a home, not refinancing or renovating one. Your recordkeeper will confirm the purpose before granting the extended repayment period.
Applying for a Home Purchase Loan
Loan applications usually come through your plan’s online portal. The form asks for the loan amount, your preferred repayment schedule, and bank account details for the transfer of funds.
Because a home purchase loan carries an extended repayment period, you’ll need proof you’re actually buying a primary residence. The standard document is a signed purchase agreement or sales contract showing your name as buyer and the property address. Without a fully executed contract, the application will either be denied or reclassified as a five-year general-purpose loan.
After you submit, the plan administrator verifies your vested balance, confirms the requested amount fits within the federal and plan limits, and checks that any existing loans don’t push you over the cap. Review usually takes three to ten business days. Approved funds arrive by electronic transfer to your bank account or, with some older plans, by mailed check. Electronic transfers are faster by several days, which matters when you’re working around a closing date. Payroll deductions begin automatically once the money is disbursed.
What Happens If You Leave Your Job
This is where a 457(b) loan gets risky for homebuyers. Your plan can require you to repay the entire outstanding balance when you separate from service.3Internal Revenue Service. Retirement Topics – Loans Borrow $40,000 for a down payment, leave three years later with $28,000 still owed, and the plan may demand immediate repayment. That’s a large sum to produce on short notice, especially after the original funds have gone into a house.
If you can’t repay, the remaining balance is treated as a distribution and reported on Form 1099-R. You owe income tax on the full amount. There is one escape hatch: you can roll over all or part of the outstanding balance into an IRA or another eligible retirement plan by your tax filing deadline (including extensions) for the year the loan is treated as distributed.8Internal Revenue Service. Plan Loan Offsets The rollover neutralizes the tax hit, but it requires having enough cash elsewhere to fund the deposit.
Before taking a 457(b) loan for a home, assess your employment stability honestly. Any realistic chance you might switch jobs or retire within the repayment period belongs in the decision.
What Happens If You Miss Payments
A missed payment can put the loan in default, and the outstanding balance becomes a deemed distribution. Most plans don’t pull the trigger immediately. A plan may provide that the loan isn’t treated as a deemed distribution until the end of the calendar quarter following the quarter in which you missed the payment.6Internal Revenue Service. Retirement Plans FAQs Regarding Loans Miss a June payment and the deemed distribution may not happen until the end of September, giving you a narrow window to catch up.
Once the deemed distribution hits, income tax applies to the outstanding balance. There’s one meaningful advantage for 457(b) participants: original 457(b) contributions aren’t subject to the 10% early withdrawal penalty that applies to distributions from 401(k) plans and IRAs before age 59½. If your 457(b) account holds money you rolled in from a 401(k) or IRA, though, those rollover amounts remain subject to the 10% penalty if distributed before 59½.9Internal Revenue Service. Additional Tax on Early Distributions From Retirement Plans Other Than IRAs
A Hardship Withdrawal Isn’t an Option for Home Buying
Some participants ask whether they can just withdraw money from the 457(b) rather than borrowing. For a home purchase, the answer is almost certainly no. Distributions from a 457(b) for an “unforeseeable emergency” require a severe financial hardship such as a medical crisis, an accident, or the imminent loss of your home to foreclosure. The IRS is explicit that buying a home and paying college tuition are generally not unforeseeable emergencies.10Internal Revenue Service. Retirement Plans FAQs Regarding Hardship Distributions A loan is the only way to reach your 457(b) balance for a home purchase while still employed.
Costs and Trade-Offs Worth Weighing
The appeal is obvious: you borrow from yourself, the interest returns to your own account, and there’s no credit check. Real costs still apply.
The biggest is opportunity cost. Every dollar you borrow is a dollar no longer invested and compounding. Over a 15-year home loan, the growth you give up can easily exceed the interest you pay back to yourself. That interest is also paid from after-tax dollars into a pre-tax account, and it will be taxed again when withdrawn in retirement. The interest portion effectively gets taxed twice.
Most plans charge a one-time origination fee and sometimes a small annual maintenance fee on outstanding loans, often in the $25 to $50 range. Modest compared to a mortgage origination fee, but worth knowing.
A 457(b) loan for a down payment doesn’t replace the mortgage on the rest of the purchase. You’ll carry two repayment obligations at once, plan loan through payroll and mortgage through your bank. Confirm your monthly budget can absorb both before you commit. If it can, a 457(b) loan can be a reasonable way to bridge a down payment gap, and the penalty-free treatment of original contributions gives it an edge over pulling money from a 401(k) or IRA.