Can I Use My Retirement Account to Buy a House?

You can use money from a Traditional IRA, a Roth IRA, or a 401(k) to help buy a house, but using retirement accounts to buy a house comes with different rules, tax bills, and penalty risks depending on which account you tap. IRAs offer a first-time homebuyer exception worth up to $10,000. Roth contributions are available at any time. 401(k) plans give you a loan option and, in some cases, a hardship withdrawal. Each path has a catch.

Traditional IRA: The $10,000 First-Time Homebuyer Exception

You can withdraw up to $10,000 from a Traditional IRA to buy a first home without paying the 10 percent early withdrawal penalty that normally applies before age 59½.¹ The $10,000 is a lifetime cap, not annual. Once you have used it, you cannot use it again.

“First-time” is looser than it sounds. You qualify as long as you (and your spouse, if married) have not owned a principal residence during the two-year period ending on the date you acquire the new home. Owned a house five years ago and rented since? You still qualify. You can also use the funds to buy a home for a spouse, child, grandchild, parent, or grandparent, provided that person independently meets the two-year test.¹

If both spouses have their own IRAs, each can withdraw up to $10,000 under this exception, for a combined $20,000 toward the same home.¹

The penalty waiver does not erase income tax. Every dollar you pull from a Traditional IRA is taxed as ordinary income in the year of the withdrawal. Depending on your bracket, that can eat a significant chunk of the money you were counting on for closing, so build the tax bill into your budget before you decide how much to take.

Roth IRA: Contributions Come Out Free, Earnings Get Complicated

Roth IRAs work differently because you already paid tax on the money going in. Under the ordering rules, your original contributions come out first, and you can withdraw them at any time, at any age, tax-free and penalty-free.² There is no dollar cap, and you do not have to qualify as a first-time buyer.

Investment earnings are the tighter piece. Roth earnings come out completely tax-free and penalty-free only when two conditions are met: your Roth has been open at least five tax years, and the distribution qualifies under an exception such as the first-time homebuyer rule, which caps earnings at $10,000 in a lifetime.¹

If your Roth is less than five years old, the homebuyer exception still waives the 10 percent penalty on earnings, but those earnings will be taxed as ordinary income.³ The five-year clock starts on January 1 of the tax year of your first Roth contribution, so an account first funded in December 2022 hits the five-year mark on January 1, 2027.

What the $10,000 Can Actually Pay For

The IRA homebuyer exception covers more than just the down payment. Qualified acquisition costs include the price of buying, building, or rebuilding a residence, along with the settlement, financing, and closing costs of the transaction.⁴ Title insurance, appraisal fees, and attorney fees generally qualify. Mortgage payments after closing do not.

The 120-Day Deadline

You have to use the IRA money on home acquisition costs within 120 days of receiving it.⁵ Miss that window and the withdrawal no longer qualifies for the penalty exception.

There is one escape hatch. If the deal falls through or gets delayed, you can put the money back into an IRA within 120 days and avoid both the tax and the penalty. This special recontribution does not count against the normal once-per-year rollover limit.⁶

Borrowing From a 401(k)

If your employer’s 401(k) allows loans, you can borrow against your vested balance instead of taking a taxable withdrawal. The federal limit is the lesser of $50,000 or 50 percent of your vested balance. If half your balance is under $10,000, some plans let you borrow up to $10,000.⁷ Not every plan offers loans, so check with your administrator first.

Because you are borrowing from yourself, a 401(k) loan is not a taxable event. No income tax, no 10 percent penalty. You repay the loan with interest into your own account, so the interest lands back in your balance rather than at a bank.

Standard 401(k) loans have to be repaid within five years, but loans used to buy a primary residence are exempt from that five-year cap.⁸ Federal law does not set a replacement maximum, so each plan sets its own residential-loan schedule. Payments have to be made at least quarterly, and most plans require substantially level payments over the life of the loan.

The Risk if You Leave Your Job

Job separation is the sharpest edge of a 401(k) loan. If you leave your employer while a loan is outstanding, most plans give you only 60 to 90 days to repay the balance in full. If you cannot, the unpaid amount becomes a plan loan offset: your account balance is reduced by what you owe, and that amount becomes taxable income.⁹ Under 59½, you also owe the 10 percent penalty on the offset.

You can avoid the tax by rolling the offset amount into another eligible retirement plan. For a qualified plan loan offset triggered by plan termination or severance from employment, you have until your tax filing due date, including extensions, for the year the offset occurs.⁹ That gives you roughly until October 15 of the following year if you file an extension. You would need to come up with the rollover amount from other savings, because the offset itself is not paid out in cash.

401(k) Hardship Withdrawals

If your plan does not offer loans, or you need more than the loan limit allows, a hardship distribution may be available. Federal regulations treat costs directly related to buying a principal residence, excluding mortgage payments, as a qualifying financial hardship.¹⁰

Hardship distributions are permanent. You cannot repay them, and the IRS treats them as distributions that are not eligible for rollover, so there is no way to unwind the tax hit later.¹¹ The full amount is taxed as ordinary income in the year you receive it.

One critical boundary: the first-time homebuyer penalty exception does not apply to 401(k) plans. It covers only individual retirement plans.¹ A 401(k) hardship withdrawal before age 59½ will owe the 10 percent penalty on top of ordinary income tax, unless a separate exception applies, such as separating from that employer in or after the year you turn 55.

How to Report the Withdrawal on Your Taxes

Your plan administrator or IRA custodian will issue a Form 1099-R for the year of the distribution. On IRA withdrawals taken before 59½, including ones that qualify for the homebuyer exception, Box 7 will typically show distribution code 1, meaning early distribution with no known exception. The IRS expects you, not the custodian, to claim the exception on your return.¹²

To claim the first-time homebuyer penalty waiver, file Form 5329 with your return and enter exception number 09 on the appropriate line.¹³ Hold on to your purchase agreement and closing disclosure. If the IRS questions the exception, those documents show the money went toward a qualifying home purchase inside the 120-day window.

State Taxes

Federal rules are only half the picture. Most states also tax retirement distributions as ordinary income, with rates running from zero in states with no income tax to over 13 percent in the highest-tax states. Few states offer a first-time homebuyer penalty exemption that mirrors the federal one, so your state bill on an early withdrawal may be higher than you expect. Check your state’s rules before you settle on an amount.

How to Request the Money

Start with your IRA custodian or your employer’s plan administrator. For employer plans, that usually means human resources or a third-party administrator’s online portal. Distribution and loan request forms ask for a reason code identifying the transaction as a home purchase, and that code drives how the distribution is reported to the IRS.

Processing generally takes a few business days to two weeks after all required paperwork is in. In many closings, the check is made payable directly to the title company or escrow agent so the funds go straight to closing costs. Submit your request well before a firm closing date. Delays can push you past the IRA 120-day deadline or throw off your purchase timeline.

1
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
2
Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs
3
Fidelity. What Is the Roth IRA 5-Year Rule and How Does It Work?
4
Legal Information Institute. Definition: Qualified Acquisition Costs from 26 USC 72(t)(8)
5
Internal Revenue Service. Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)
6
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts – Section 72(t)(8)(E)
7
Internal Revenue Service. Retirement Topics – Loans
8
Internal Revenue Service. Issue Snapshot – Plan Loan Cure Period
9
Internal Revenue Service. Plan Loan Offsets
10
eCFR. 26 CFR 1.401(k)-1 – Certain Cash or Deferred Arrangements
11
Internal Revenue Service. Topic No. 424, 401(k) Plans
12
Internal Revenue Service. Instructions for Forms 1099-R and 5498
13
Internal Revenue Service. Instructions for Form 5329