If you have money in your 401(k), you might be able to take it out to buy a house. While the 401(k) is supposed to be used for your retirement, it still offers a few ways for you to take out your money early. Your best option depends on how your employer designed the plan and the amount of money you need.
TL;DR (Too Long; Didn't Read)
You can take money out of your 401(k) to buy a house, although there is a limit to how much you can withdraw before retirement age to avoid a penalty.
Your Withdrawal Options
The IRS designed the 401(k) with two options for withdrawals while you are working. You might be able to take a loan or a hardship withdrawal from your savings. Your options depend on your employer.
When your employer launched the 401(k), he decided whether he wanted employees to be able to take loans and early withdrawals. If your employer doesn't allow either, you won't be able to take your money out to buy a house (until you retire, that is).
How 401(k) Loans Work
If your plan allows loans, there are some cases where it makes sense since it's one way to tap into a 401(k) without paying a penalty for early withdrawal. Also, you can take up to five years or longer to repay the loan if you use it to purchase your primary residence. The IRS limits the amount you can borrow, depending on how much you have in your account. If you have over $100,000, you can borrow up to $50,000. If you have less than $100,000, you can borrow up to half your account balance.
One of the downsides of a 401(k) loan is that you must keep up with your repayment schedule or the loan will be reported to the IRS as a withdrawal. Also, you may be required to pay the loan back in full if you change jobs or the loan will be treated as a distribution.
Understanding Hardship Withdrawals
You can also use a hardship withdrawal to take money out of your 401(k). To take a hardship withdrawal, you need to prove an immediate and heavy financial need, according to the IRS. The IRS lists that buying a house meets this definition so you can take a hardship withdrawal.
When you take out withdrawal, you'll owe income tax on the entire amount. If you are younger than 59 1/2, you may also be subject to a 10 percent penalty for early withdrawal.
Rollovers and the IRA
If you quit your job, you have one more option to take out your 401(k) money. You are allowed to move your 401(k) into another account through a rollover, which you won't have to pay tax on. Depending on your company, you might be able to transfer this money directly into your bank account. If you decide to keep the money in your bank and don't roll it over, it will be treated as a distribution and you will be subject to income tax and a 10 percent penalty on the entire amount.
You can also move the money into an IRA. The IRA lets you take out up to $10,000 to buy your first home. There is no penalty on this withdrawal, but you will need to pay income tax on it.
David Rodeck has been writing professionally since 2011. He specializes in insurance, investment management and retirement planning for various websites. He graduated with a Bachelor of Science in economics from McGill University.