What you can actually withdraw from a 401(k) for a down payment
You can take money out of your 401(k) for a down payment in three ways: a loan against your balance, a withdrawal under the first-time homebuyer exception, or a hardship withdrawal. Each has different rules about how much you can take, what taxes you owe, and whether you have to pay it back. The method that works depends on your plan's rules, your age, and how much you need.
Not every 401(k) plan allows all three options. Your plan documents spell out what is permitted, and your plan administrator can tell you which routes are open to you. If your employer offers a 401(k) match, taking money out early can also mean losing future matching contributions, which costs you more than the withdrawal itself.
Key Takeaways
- A 401(k) loan lets you borrow against your own balance and repay it over time, with no tax penalty, but you must repay it or face taxes and a 10% penalty if you leave your job.
- The first-time homebuyer exception lets you withdraw up to $35,000 lifetime from a traditional or Roth 401(k) without the 10% early withdrawal penalty, though you still owe income tax on traditional 401(k) withdrawals.
- A hardship withdrawal is available only if your plan permits it and you meet the plan's definition of hardship, which varies by employer and does not include saving for a down payment at most plans.
- Withdrawals before age 59½ from a traditional 401(k) trigger income tax plus a 10% penalty unless an exception applies; Roth 401(k) withdrawals of earnings also face tax and penalty unless an exception applies.
- If you take a loan and then leave your job, the loan balance typically becomes due within 60 to 90 days or it is treated as a taxable withdrawal.
401(k) loans: how they work and what happens if you leave your job
A 401(k) loan lets you borrow money from your own account balance and repay it through payroll deductions, usually over five years. You pay yourself back with interest—the rate is set by your plan, often prime rate plus 1 or 2 percent—and the interest goes back into your account. There is no tax on the withdrawal itself, and no 10% penalty, because you are borrowing, not withdrawing.
The catch is what happens if you leave your job. Most plans require the full loan balance to be repaid within 60 to 90 days of your departure. If you cannot repay it in that window, the outstanding balance is treated as a taxable withdrawal. You owe income tax on the amount, plus a 10% early withdrawal penalty if you are under 59½. This can turn a $30,000 loan into a $10,000 to $15,000 tax bill.
Some plans allow you to keep making loan payments after you leave, but this is rare. Before taking a 401(k) loan, ask your plan administrator in writing what happens to the loan if you resign, are laid off, or are fired. Get the answer in writing so you have it if circumstances change.
The first-time homebuyer exception: $35,000 lifetime limit
The IRS allows you to withdraw up to $35,000 from a 401(k) or 403(b) without the 10% early withdrawal penalty if you are a first-time homebuyer. "First-time" means you have not owned a home in the past two years—it does not mean you have never owned one. You can use the money for your down payment, closing costs, or to repay a loan you took to buy the home.
This exception applies to both traditional and Roth 401(k)s, but the tax treatment differs. On a traditional 401(k) withdrawal, you owe income tax on the full amount you withdraw. On a Roth 401(k), you owe no tax on the withdrawal itself if the account has been open for at least five years and you are over 59½; if you do not meet both conditions, you owe tax on the earnings portion of the withdrawal, though not on your contributions.
The $35,000 limit is a lifetime cap per person, not per purchase. If you withdraw $20,000 for a down payment now, you can withdraw only $15,000 more under this exception for the rest of your life, even if you buy another home later. Some plans also require you to withdraw the full $35,000 at once rather than in installments.
Hardship withdrawals: narrow rules and plan-specific limits
A hardship withdrawal lets you take money out before age 59½ without the 10% penalty if your plan permits it and you meet the plan's definition of hardship. The IRS sets a floor—immediate and heavy financial need—but individual plans can be stricter. Most plans do not treat saving for a down payment as a hardship, even if you are a first-time buyer.
Plans that do allow hardship withdrawals typically cover expenses like medical bills, funeral costs, preventing eviction or foreclosure, or repairing damage to your primary home. A few plans include home purchase, but you have to check your plan documents or ask your administrator. Even if your plan allows it, you usually have to show that you have exhausted other resources—loans, borrowing from family, or other retirement accounts—before the plan will approve the withdrawal.
Hardship withdrawals are also subject to income tax and the 10% penalty unless another exception applies. The first-time homebuyer exception does not stack with a hardship withdrawal; you use one or the other, not both.
Tax consequences: what you owe and when
A withdrawal from a traditional 401(k) is taxed as ordinary income in the year you withdraw it. If you withdraw $30,000, that $30,000 is added to your other income for the year and taxed at your marginal rate. If you are in the 22% tax bracket, you owe roughly $6,600 in federal income tax, plus state income tax if your state has one. You may also owe the 10% early withdrawal penalty—another $3,000—unless an exception applies.
A Roth 401(k) withdrawal is more complex. Your contributions come out tax-free. Your earnings come out tax-free only if you are over 59½ and the account has been open for at least five years. If you do not meet both conditions, the earnings portion is taxed as ordinary income and subject to the 10% penalty unless an exception applies. The first-time homebuyer exception waives the 10% penalty but not the income tax on earnings.
Your employer will withhold taxes from the withdrawal—usually 20% for a lump sum—but withholding is not the same as paying your full tax bill. If your total tax owed is higher than what was withheld, you owe the difference when you file your return. If it is lower, you get a refund.
Comparing 401(k) loans, first-time homebuyer withdrawals, and other sources
| Method | Amount available | Repayment | Tax on withdrawal | 10% penalty | Risk if you leave job |
|---|---|---|---|---|---|
| 401(k) loan | Up to 50% of balance, usually $50,000 max | Yes, through payroll over 5 years | None | None | Full balance due in 60–90 days or treated as taxable withdrawal |
| First-time homebuyer exception | Up to $35,000 lifetime | No | Yes on traditional 401(k); no on Roth if conditions met | Waived | None; money is yours |
| Hardship withdrawal | Varies by plan; often limited to immediate need | No | Yes | Yes, unless exception applies | None; money is yours |
| IRA withdrawal (if you have one) | Up to $35,000 lifetime for first-time homebuyer | No | Yes on traditional IRA; no on Roth if conditions met | Waived | None; money is yours |
If you have both a 401(k) and an IRA, you can use the first-time homebuyer exception on both, up to $35,000 from each account. A 401(k) loan is attractive if you want to avoid taxes now and can repay it, but it is risky if your job is unstable. A withdrawal under the first-time homebuyer exception locks in your tax bill upfront but gives you certainty—once the money is out, it is yours and you do not have to repay it.
Some people also borrow from family, take a personal loan from a bank, or delay the purchase to save more. Each option has trade-offs: family loans can strain relationships, personal loans charge interest and require qualification, and waiting means staying in your current housing situation longer. Compare the cost of each option—including taxes and penalties—before you decide.
What to do before you withdraw: questions to ask your plan administrator
Before you take any money out, contact your plan administrator—usually through your employer's benefits department or the plan's website—and ask these questions in writing so you have documentation:
- Does the plan allow 401(k) loans? If yes, what is the maximum I can borrow, and what is the interest rate?
- If I take a loan and leave my job, how long do I have to repay it, and what happens if I cannot?
- Does the plan allow the first-time homebuyer exception? If yes, can I withdraw the full $35,000 at once or in installments?
- Does the plan allow hardship withdrawals? If yes, does it include home purchase, and what documentation do I need?
- What is my current account balance, and how much of it is vested (fully yours)?
- If I withdraw money, will I lose any employer match or other contributions?
Some plans have online portals where you can see your balance and request a withdrawal. Others require phone calls or paper forms. Get the process in writing before you start, because delays can push your closing date. Keep copies of all correspondence with your plan administrator in case questions arise later about the withdrawal or its tax treatment.
Frequently Asked Questions
Can I use a 401(k) withdrawal to pay closing costs, or only the down payment?
Yes, the first-time homebuyer exception covers closing costs, property taxes, homeowners insurance, and other costs directly related to buying the home. You can also use it to repay a loan you took to buy the home. The IRS does not require you to use the money only for the down payment itself.
What if I am not a first-time homebuyer but my spouse is?
Your spouse can use the first-time homebuyer exception on their 401(k) or IRA. You cannot use it on yours unless you also meet the definition—you have not owned a home in the past two years. If you are married filing jointly and you owned a home together, neither of you qualifies.
If I take a 401(k) loan, can I pay it back faster than five years?
Yes, most plans allow you to repay a loan faster without penalty. Paying it back sooner means less interest and less risk if your job situation changes. Ask your plan administrator whether you can make lump-sum payments or increase your payroll deduction.
What happens to my 401(k) loan if I am laid off?
The loan balance typically becomes due within 60 to 90 days. If you cannot repay it, the outstanding balance is treated as a taxable withdrawal and you owe income tax plus a 10% penalty if you are under 59½. Some plans allow you to continue making payments as an individual, but this is uncommon—ask your administrator before you take the loan.
Can I borrow from my 401(k) and also use the first-time homebuyer exception?
Yes, but they are separate transactions. You can take a loan for part of your down payment and withdraw under the first-time homebuyer exception for another part. The loan must be repaid; the withdrawal is yours to keep. Make sure your plan allows both before you commit to either.