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How to Withdraw from Your 401k or IRA for the Down Payment on a House

By Kira Botkin

down payment house retirementBuying a home can be a big step towards securing your financial future, but saving for the down payment can be very time-consuming.

However, if you already have money in your retirement accounts, you might be able to use it to speed up the process. We’ll discuss which accounts don’t penalize you when you use the money to buy a first home as well as strategies for saving on penalties and taxes.

Using Your IRA for a Home Down Payment

The IRS discourages you from withdrawing money from your retirement accounts early by charging a 10% penalty on withdrawals before you turn 59 1/2.

Roth IRA

Among the various kinds of retirement accounts, pulling money from a Roth IRA will cost you the least in taxes and penalties. This is because you can withdraw contributions at any time without penalty or tax. In addition, after you’ve held the account for five years, you can withdraw up to $10,000 in earnings without penalty or tax for the purchase, repair, or remodel of a first home. In other words, if you withdraw all of your contributions, you can still withdraw another $10,000 and not pay the 10% penalty or taxes on any of it.

There is one caveat however: you only have 120 days to spend withdrawn earnings or you may be liable for paying the penalty. Also, for your convenience, your financial services firm will automatically prioritize the withdrawal of all of your contributions from a Roth IRA before any earnings.

Traditional IRA

The next best choice is a traditional IRA. You’re still able to withdraw up to $10,000 for the purchase, repair, or remodel of a first home without paying a penalty, but you’ll have to pay regular income tax on the entire amount. SIMPLE and SEP IRAs follow the same rules.

With a traditional IRA, you must also use the money within 120 days for the purchase of a home or you’ll get hit with the 10% penalty. Alternatively, you can withdraw up to $10,000 penalty-free for the purchase of a home for your spouse, parents, children, or grandchildren.

Just like with a Roth IRA, your spouse can also withdraw $10,000 from his or her traditional IRA, so you can collectively obtain $20,000 penalty-free for a down payment if you’re married. The $10,000 limit is a lifetime limit for each individual.

Using Your 401k for a Down Payment

There’s no specific penalty exemption for home purchases when you pull money out of a 401k, so any money you take out will be classified as a “hardship exemption.” You’ll be assessed a penalty of 10% on the amount withdrawn and you’ll have to pay income tax on it as well.

If possible, roll over the amount you want to withdraw to an IRA, so you can avoid paying the penalty. However, you can’t roll over a 401k that’s with an employer for whom you are still working. If you have an old 401k from a former employer, roll that. Since a rollover can take time to process, fill out the necessary paperwork as soon as possible.

Borrowing from Your 401k

Another option with a 401k is to take out a loan. Your loan can be up to $50,000 or half the value of the account, whichever is less. As long as you can handle the payments (yes, you have to pay back this loan), this is usually a less expensive option than a straight withdrawal. Though you will pay interest, you won’t pay taxes or penalties on the loan amount.

A few things to know about 401k loans:

  • Since you’re incurring debt and will need to make monthly payments on the loan, your ability to get a mortgage may be affected.
  • The interest rate on 401k loans is generally about two points above the prime rate. The interest you pay, however, isn’t paid to the company – it goes into your 401k account.
  • Many plans give you only five years to repay the loan. In other words, if you borrow a large amount, the payments could be substantial.
  • If you leave your company, you may be required to pay back the outstanding balance within 60 to 90 days or be forced to take it as a hardship withdrawal. This means you’ll be hit with taxes and penalties on the amount you still owe.
  • If payments are deducted from your paycheck, the principal payments will not be taxed but the interest payments will. Since you’ll be taxed again on withdrawals during retirement, the interest payments will end up being double-taxed.

Sometimes it makes sense to take a loan from your 401k to cover the down payment, like if you’re getting an FHA loan and only need a small down payment. However, a large loan payment could have a big effect on your mortgage qualification.

Consider that a $5,000 401k loan will have a payment of $93 per month (at a 6% interest rate) over five years, while a $25,000 loan will have a payment of $483 per month. The latter payment could seriously hinder your ability to pay the mortgage every month, and the bank will take this into consideration when figuring what you qualify for.

Therefore, it’s wise to run numbers and ask your mortgage broker how such a loan will affect your qualification before you take one out. Conversely, if the amount you need will have too adverse an affect on your qualification, it might make sense to withdraw the down payment amount and pay the taxes and penalties.

down payment money house keys

Mortgage Interest Tax Strategy

Keep in mind that you’ll be deducting mortgage interest on your taxes after you purchase your home. This may actually “wash” with some or all of the income you report from a retirement account withdrawal.

For example, let’s say you withdrew $25,000 from your 401k and paid $25,000 in mortgage interest the same year. The $25,000 you’ll report in additional income (from the 401k withdrawal) will “wash” with the $25,000 mortgage interest deduction. In other words, your taxable income won’t be increased by the withdrawal, and you will effectively pay no tax on it.

However, you will still be liable for the 10% penalty, which is $2,500 in this case. This type of strategy can work for IRA, SIMPLE, and SEP withdrawals as well, but you won’t be liable for the 10% penalty unless you withdraw more than $10,000.

Retirement Account Withdrawal Comparison

So which is best? This depends on what accounts you have and how much you have contributed to them. But in general, you’ll be assessed fewer taxes and penalties if you withdraw money for your down payment from a Roth before a traditional IRA, and from either of those before a 401k. Whether a 401k loan is better than an IRA withdrawal depends on how large it is and whether it will affect your ability to qualify for the amount and type of mortgage you want.

  • Contributions in your Roth IRA: No income tax due, will not owe 10% penalty.
  • Earnings in your Roth IRA up to $10,000 for the purchase of a first home: No income tax due, will not owe 10% penalty.
  • Small 401k loan: Will not owe income tax or penalty. Monthly payments will be small and will have a minimal affect on mortgage qualification.
  • Any withdrawal from a traditional IRA, SEP-IRA, or SIMPLE IRA up to $10,000 for the purchase of a first home: Income tax due, will not owe 10% penalty
  • Earnings in your Roth IRA over $10,000 for the purchase of a first home: Income tax due, will owe 10% penalty.
  • Any withdrawal from a traditional IRA, SEP-IRA, or SIMPLE IRA over $10,000: Income tax due, will owe 10% penalty
  • Large 401k loan (limited to half of balance or $50,000, whichever is smaller): Will not owe income tax or penalty. Monthly payments can be large and substantially affect mortgage qualification.
  • 401k withdrawal of any amount: Will owe income tax and 10% penalty.

Final Word

I withdrew money from my IRA to purchase our home and am especially happy since the stock market tanked soon after. Saving up for a down payment can take quite a while. The sooner you get into a home, the sooner you can start saving money on rent and deducting the mortgage interest on your taxes every year. You can also withdraw up to $10,000 without penalty from these accounts for the remodel or repair of a first home.

Are you planning to purchase a home soon? What is your source for the down payment?

(photo credit: Shutterstock)

Kira Botkin
Kira is a longtime blogger and serial entrepreneur who enjoys gardening, garage sales, and finding stray animals. She lives in Columbus, Ohio, where football is a distinct season, and by day runs a research study for people with multiple sclerosis. She hopes that the MoneyCrashers team can help you achieve your goals and live a great life.

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  • http://twitter.com/schlongaberger Zak

    One thing you forgot to mention is that you can easily offset much of your 401k loan payment by decreasing the contribution to your 401k. For instance, I put in 15% of my pay pre-tax (especially since SS this year went down 2%). I could easily take out 25,000 as a loan and pay it back over 5 years by bringing my contribution down to 7 or 8%, and still make the same net income. Either way, with interest rates as low as they are today, you should just make sure that you a void PMI. Thats money you’ll never get back.

  • Rgenteen2

    Does it make sense to pull money from your 401k to purchase income property? We could no afford taking a loan against it.

    • Kira Botkin

      Probably not – there’s no tax break unless it’s a home you’ll live in, and so taking $10,000 out would actually cost you more like $14,000 after taxes and penalties are figured in. And if you can’t afford a loan on the property, you probably can’t afford a 401k loan, which is paid back much more quickly.

  • Esco

    Hello, I have 2 Roth IRA’s from 2 different places (A Vanguard IRA and a TSP Account with the Govt)… am I only allowed to pull the 10,000 from one of these accounts or am I able to pull 10,000 from each account? Thank you. :)

    • Kira Botkin

      It’s $10,000 total, no matter where it comes from. Make sure you have held the Roth IRA for at least five years, also.

  • Carol

    I am a widow and have just purchased my first house, that was not jointly owned with my husband. Is the law liberal enough to permit me to borrow from my Roth or Traditional IRA without penalty for remodeling if I repay the amount borrowed?

    • Kira Botkin

      If you have already purchased the home, you can’t withdraw the $10,000 now for the home, since it is intended to be used for the down payment. You also cannot “borrow” from an IRA in the same manner as a 401k. However, if you are over retirement age, you can simply withdraw money from the Roth IRA without paying taxes. If you are not over retirement age, you can withdraw your original contributions from the Roth without penalty. As far as repaying it, you can put money back up to your maximum contribution for the year ($5,000 if you’re under 50 and $6,000 if you’re over 50). It sounds like just getting a home equity loan might be a better solution for you if you don’t want to actually permanently withdraw this money from your IRA.

  • anahy

    I cashed out of my 401k company i work for cancel we no longer have it my original plan is to buy a home but I havent’ found one its been about 4 months I am still getting taxed even if I will use it for a home purchace?

    • Kira Botkin

      You only get a tax exemption when you pull money out of an IRA, not a 401k, and you certainly can’t cash it out and then months later use it for a home purchase. Yes, you will definitely still have to pay taxes on that money, probably in addition to an early withdrawal penalties. It would have been much better to roll that money over to an IRA instead of cashing it out, but since you have already cashed it out and it is beyond the 60 day period where you could potentially have put it back, you have no choice but to pay taxes on it, no matter what you are using it for.

  • Reiter Tommy

    Rules for first time buyer. If you owned an home but it has been over ten years, will you qualifty as first time buyer for being able to borrow against an IRA

    • Kira Botkin

      If you sold it over ten years ago, then yes, you would qualify again as a first-time buyer. However, you cannot borrow against an IRA – the first-time buyer exception helps you avoid the 10% penalty when you WITHDRAW from an IRA, not borrow.

  • http://www.facebook.com/profile.php?id=507694523 Janer Esco

    Hi Kira,

    I have a question, you stated that I could take out up to 10k from my IRA for home repair and/or remodel, how does the IRA company know if we’re spending all that money on what we stated it was supposed to be used for? Would I provide receipts to them when the job is completed? If so, what happens if I only spend $9,900, would I be required to put the $100 back into my IRA? Thank you :)

    • Kira Botkin

      The IRA company won’t know, but you might need to provide that information to the IRS if you get audited. So I’d keep your receipts. They might also pull bank records to see where the money went.

  • Ram

    Hi Kira,
    Can me and my wife withdraw from our Traditional IRA’s ($10,000 respectively) for the first purchase of a home in the US even though we have additional properties abroad? What is the rule? Is it for the first purchase of a home in the US or worldwide?

    thanks
    Ram

    • Kira Botkin

      As long as you’re going to actually live in the home in the US, the IRS should not have an issue with that. They do not keep track of properties you own elsewhere.

  • Jtrekker7

    Kira,

    If I wanted $10k to help finance a property acquisition and determined I’d withdraw it from my retirement accounts, where is the best place to take from?

    At first glance, the Roth IRA seems like the place to withdraw. But, I am trying to evaluated it in terms of opportunity cost to receive $10k. In other words, what will it afford me if I withdraw from my Traditional IRA versus Roth IRA? Assume a taxation rate (present and future) of 30% and a growth rate of 9%.

    To get 10k from a Roth IRA, I simply withdraw 10k worth of contributions.. so the opportunity cost would be 10k growing tax free. Earning/compounding 9% over 30 years, this amounts to $121,721.

    Now, if I wanted to get 10k out of my Traditional IRA it’d cost $14,285.71 assuming 30% tax rate upon withdrawal (I know the limit is 10k for the first time home purchase, but to compare apples to apples let’s calculate what it’d cost to get $10k in cash). $14,285.71 compounded over 30 years amounts to $173,888.26. However, this would be taxed when withdraw (assuming 30%) ..it now equals $121,721.78.

    Is it really a wash? Something isn’t lining up.. I am having a hard time determining where I conceptually went wrong.

    Taking 10k directly from my traditional IRA only gives me $7k up front, but the opportunity cost (what the 10k would be if I left it in) is less [due to taxes] than the Roth IRA.

    Taking 10k directly from my Roth IRA gives me $10k up front, but results in a higher opportunity cost (what the 10k would be if I left it in) bc no taxes are required on the future withdrawal.

    I feel like this needs a time value of money calculation. Is the 3k now worth the difference I’m going to get by leaving the 10k in either account?

    What are your thoughts/analysis results?

    John

    • Kira Botkin

      Well, I haven’t run the math, but it seems to me that taking 30% off the original amount and then compounding by 9% over 30 years, vs compounding by 9% over 30 years and then taking 30% off would logically get you the same amount.

      You should also take into account the savings over renting, and the investment value of the money you just used to buy the house. That 10k you took out isn’t just sitting there doing nothing – your home value should also presumably go up, so you’re really getting a good bit of leverage on the 10k if you use it to buy a home that goes up in value. The time value of the money is not equal, since the housing market is presumably not going to perform like the stock market, but the opportunity cost gap is not huge.

      The starting error in the math though is that if you take $14k+ out of your traditional IRA, $10k for the home purchase and the rest for the taxes, is that the extra money you take out to pay the taxes isn’t penalty-free. I imagine most people either take out less if they have a traditional IRA, or they pay the taxes with other money.

  • ew

    Now we are in our first home for 11 years looking to buy a new. Could we borrow/withdrawal from either my Ira or my husbands 401K. Or the first home rule doesn’t apply to us?

    • Kira Botkin

      If you’re both on the first home, then no, that isn’t really a first home, is it? :) If only one of you bought the first house, then conceivably the other one could buy the second, and that would be a “first” home for the person who wasn’t on the other home. But most likely you are out of luck as far as getting money out without paying a penalty.

  • Cuitlahuac Velazquez

    need $5,000,00 fast, have a 401K, but had not contribute for 2 yrs. what is my best option? I consult for $2,000.00 a month. can I take a loan? what is my best option?

    • Kira Botkin

      I can’t say directly because there are many different factors that affect whether you can do that.
      1 – How big of a 401k balance do you have? You can only take out a loan for up to half of the 401k’s value.
      2 – How much you make per month doesn’t usually matter to the lending party (your 401k servicer) unless the loan is pretty big, but that again depends on how many years the servicer permits you to pay it back over.
      3 – By consulting, do you mean you work as a consultant for a company? If you are a regular employee, that should be fine, but if you mean you are a freelancer or work for yourself, and want to pull money from an old 401k from a previous job, you will have to check with them for their rules since they can no longer take the loan money from your paycheck.
      4 – Whether you contributed recently doesn’t matter, but if you haven’t looked at this account in a long time, you might find it doesn’t contain as much as you thought it did.

    • Prince mike

      Dear customer you are welcome to Prince Mike Loan Inc. Your message regarding the loan you seek from this management was received and it content was noted. We render services such as; Automobile loan, Home loan, capital loan, car purchase loan, company loan, personal loans etc. We are offering a floating loan scheme at 2% interest rate between the amount of $2,000.00 to $20,000.000.00. Our terms sprung from One year to Twenty-five years maximum. In order for us to commence the processing of the loan, fill and return the bellow details for the calculation of your loan term interested person should please contact us via Email: [email protected]

  • gmaval

    While married I was a stay at home mom and my husbnad contributed to an IRA account for me. We have been divorced for many years but where is my IRA account? How can I find my IRA account?

    • Kira Botkin

      There’s no central registry or anything for IRAs, if that’s what you were thinking of. If you know what financial institution it was set up with, you could contact them, and if you think it might have been abandoned, you could try missingmoney.com, but otherwise you are going to have to ask your ex-husband…

      • Prince mike

        Dear customer you are welcome to Prince Mike Loan Inc. Your message regarding the loan you seek from this management was received and it content was noted. We render services such as; Automobile loan, Home loan, capital loan, car purchase loan, company loan, personal loans etc. We are offering a floating loan scheme at 2% interest rate between the amount of $2,000.00 to $20,000.000.00. Our terms sprung from One year to Twenty-five years maximum. In order for us to commence the processing of the loan, fill and return the bellow details for the calculation of your loan term interested person should please contact us via Email: [email protected]

    • Kira Botkin

      Alternately, you might be able to get some information from tax filings submitted during the time he was contributing. If you don’t have the files, you may be able to buy a copy of your old tax filings from the IRS, but I don’t know how far back they can provide them.

  • Chris

    Would be so grateful if you can help me. My wife and I cashed out our IRA, around $70,000.00, to buy a house in Neveda for retirment. We were tired of getting 0.5% return, and grief from the stock market swings. This will be the 2nd home, understand we can use 10K, each for purchase of home. That would mean 20 K for life. Is this correct? In reading the rules I guess the law states purchase of house for spouse, parents, grandchildren and so on. We based our budget in renting the property and paying the penalty, since purchase was Bank owned home, under valued. In essence we have made up on the appreciation of the home. Thanks very much.

    • Kira Botkin

      I see several issues in your comment that need to be addressed:

      1 – You only get the break on the penalty when you’re withdrawing money for a FIRST home. You said that this was a second home – do you mean that it’s the second home you own right now, or the second home you’ve ever bought? If you already own a home and you buy this home, it’s not a first home, and you don’t get the penalty waived for buying a second home. If it’s the second home you’ve EVER bought and there is a significant time gap between the first home’s sale and the second home’s purchase, then it might qualify for the penalty waiver.

      2 – Yes, it is 10k per person for life. You are permitted to use it to buy someone else a house, but you can’t withdraw 10k and buy a home for every person on that list.

      3 – You mention that you are renting the property. I hope you mean you’re renting part of it, because you must live in the property. You can’t get a penalty waiver if you’re buying investment property.

      4 – You only have 120 days to buy the property with your IRA money and get the penalty waiver. If you already cashed it out, you need to buy that property right quick or you will lose the ability to get the penalty waiver altogether.

      • zanepulliam1

        thanks.. the one thing I didn’t say .. the property is in an LLC.. which is managed by my wife.. anything there?

        • Kira Botkin

          You didn’t provide any more information for me, so the answer doesn’t change….

  • Zane pulliam

    Kira.. I have a question.. I am retired and have several IRA accounts.. I withdrew money from one of my under performing accounts to buy investment property. I know I don’t owe the 10% because I am over 62 years of age. what are my tax ramifications on the money I with drew that was the under performing account, to put a large down payment on the investment property?

    • Kira Botkin

      The discussion above concerns how you can avoid paying the 10% penalty when you use the money for a house. If you’re over 59 1/2, you can withdraw the money from your IRA for any reason you want without penalty. So you personally wouldn’t owe the 10% penalty on the money no matter what you used it for.

      The tax you pay on the money is an entirely separate matter and depends on what kind of IRA it is. If it’s a traditional IRA, you’re going to add the withdrawal to your taxable income for the year and pay regular income tax on it. If it’s a Roth IRA, you won’t owe any tax at all. Again, doesn’t matter what you use it for – even if you were under the retirement age, this would apply.

  • Peterwupt

    I already have my first home and did not use my 401k. I want to purchase a second home but jointly with my new spouse. Can this still be considered a 1st home?

    • Kira Botkin

      No. It would be considered a second home, because you already own a home.

  • Prince mike

    Dear customer you are welcome to Prince Mike Loan Inc. Your message regarding the loan you seek from this management was received and it content was noted. We render services such as; Automobile loan, Home loan, capital loan, car purchase loan, company loan, personal loans etc. We are offering a floating loan scheme at 2% interest rate between the amount of $2,000.00 to $20,000.000.00. Our terms sprung from One year to Twenty-five years maximum. In order for us to commence the processing of the loan, fill and return the bellow details for the calculation of your loan term interested person should please contact us via Email: [email protected]

  • Prince mike

    Dear customer you are welcome to Prince Mike Loan Inc. Your message regarding the loan you seek from this management was received and it content was noted. We render services such as; Automobile loan, Home loan, capital loan, car purchase loan, company loan, personal loans etc. We are offering a floating loan scheme at 2% interest rate between the amount of $2,000.00 to $20,000.000.00. Our terms sprung from One year to Twenty-five years maximum. In order for us to commence the processing of the loan, fill and return the bellow details for the calculation of your loan term interested person should please contact us via Email: [email protected]

  • Richard Sosa8

    Hi Kira, I want to use as much money as possible from my IRA accounts for a purchase of my first home. I was planning on taking out the $21K in contributions from my Roth IRA as well as the $10K limit on my Rollover IRA. My question is can I take an additional $10K from the earnings in my Roth IRA? I’ve had my Roth IRA for 7 years, but the majority of the earnings were generated over the last three years.

    • Kira Botkin

      Doesn’t matter, you can only take 10k total from all of your IRAs, no matter how many you have or how old the earnings are. You can’t take 10k from each one.

      • Roobah

        Kira, could I take $10k from a Roth IRA and $10k from my current employer 401k as a hardship loan – hardship because I don’t have any more liquid cash available – as a federal TSP, payback interest rate 1.5% APR, up to 10 years to increase my downpayment if my lender says I need $20k down? Or am I still stuck at the $10k cap? If I have a 3rd Traditional IRA, can I suplement the downpayment by cashing that out and applying the payment toward a mortgage downpayment and paying the income tax, or would that also come with the 10% penalty, too?

        I’m looking to maximize my cash downpayment with minimal tax due.

        Thanks.

  • foo223

    Hello,

    I’m a US Citizen currently residing in Germany. I’d like to use the $10,000 from my IRA to buy my first house here in Germany. Do the same rules apply for purchasing foreign homes?

    Thanks,
    Craig

    • Kira Botkin

      There’s no specific rule in Publication 590 saying that the home has to be in America. I’d call the IRS and ask, but I don’t see why not.

      • foo223

        ok, great thanks!!

  • Clint Knutsen

    Hello. I am 25 years old and bought my first house (a townhouse) almost 3 years ago now. I am looking at buying a single family home now and renting my townhouse out and was considering withdrawing $10,000 from my sep-ira for the down payment. My girlfriend and I had a baby about 8 months ago and was told that this is considered a major life changing event and can receive a FHA loan as a first time home buyer? Does that same rule apply for not paying the tax penalty?

    Thanks,

    CK

    • Kira Botkin

      Nope, sorry. The IRS is not nearly so nice as the FHA.

      • Clint Knutsen

        Is there any other option or way around that?

        • Kira Botkin

          If you get married, you could buy the house for your spouse, and that would qualify. That seems like a lot of hassle to save a thousand bucks, though. =) (Remember that using the money for a home only gets you out of paying the 10% early withdrawal penalty, not out of paying income tax on the money.)

  • rsb66

    Hi – I have about $60k in my 401K at work, I want to help refinance my girlfriends house and put myself on the deed as well. What’s the best way to get about half of the money out without paying a ton of fees?

    Thanks,
    RB

    • Kira Botkin

      Unfortunately, “girlfriend” is not in the list of relatives for whom you can purchase a house using this tax break. If you mean you will be on the refinanced mortgage as well as the deed, you can roll 10k over to an IRA and withdraw it penalty free (but still have to pay taxes). After that, you will have to pay the 10% penalty if you do a straight withdrawal, or take a loan from the 401k, which also costs you in taxes.

  • Sellyp_02

    We took $10,000 from our IRA for our down payment, turns out our down payment will be around $6000. What can I do with the rest so we don’t get hit with the penalty?

    • Kira Botkin

      If it hasn’t been more than 60 days since you withdrew the money, you can put the rest back without penalty. If it’s been more than 60 days, you are unfortunately out of luck.

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  • teamswitzer

    thanks for the GREAT responses, it is VERY helpful! We are buying our first home and ALL of the requirements fit us, however I am wondering about the “remodel” aspect. The home we would like to buy is in need of flooring, fridge, stove, paint in order to make it liveable – can we use our IRA money for that as well? As long as we keep receipts if we ever get audited?

    • Kira Botkin

      Yes, if you meet all other requirements, the IRS doesn’t specify exactly HOW ugly the kitchen wallpaper must be in order to use the money to replace it. “Remodel” in this sense means they don’t want you to use the money to build an addition, but you can rework what is already there.

  • Collins

    I have a question! I work in this company for 11 years, I have this benefit retirement savings account, the employer contribute every month but I don’t contribute with any amount. I would like to purchase my first home, my question is Can I withdrawal part of the money from my retirement savings account even I haven’t contributed any amount.

    • Kira Botkin

      Well, I’m confused. It doesn’t matter whether you contributed the money or not, but it would be unusual for an employer to contribute to your 401k without it being matched to your contributions. Is this a 401k account that’s under your control?

  • Mike

    I have a 401k from a past employer and wish to roll it out, into a roth and/or current employer 401k, with a focus on best bang for the buck toward a first time home buying in california. I will probably need around $20,000. I’m torn between the 10k limitation of the IRA vs the Loan capability of the 401k in coming up with that amount. Would it make more sense to roll it all over to my employer 401k, then split out enought into an IRA to take the 10k tax advantage, and finally borrow the last $10k against my current employer 401k. Limitations?

    • Kira Botkin

      I think the split plan is probably your better bet, because if you want to leave the employer for whatever reason, you will have to pay back the whole thing right then, and you often only have five years or so to pay it back. But on the other hand, some 401k plans don’t allow smaller loans, in which case you’d have to get a larger loan or nothing at all.

  • Mike

    I have a 401k from a past employer and wish to roll it out, into a roth and/or current employer 401k, with a focus on best bang for the buck toward a first time home buying in california. I will probably need around $20,000. I’m torn between the 10k limitation of the IRA vs the Loan capability of the 401k in coming up with that amount. Would it make more sense to roll it all over to my employer 401k, then split out enought into an IRA to take the 10k tax advantage, and finally borrow the last $10k against my current employer 401k. Limitations?

  • Curls78

    Hello, I took 10,000 from my IRA to purchase my first home. It feel threw and I did not get the home. What is going to happen come tax time next year? Thanks for your help.

    • Kira Botkin

      It’s going to be treated as an early withdrawal, and you will owe the 10% penalty and income taxes on it. If it’s been less than 60 days, you can put it back, but if it’s more than that, you can’t. You could offset it somewhat by contributing up to your maximum to a traditional IRA this year, or bumping up your contribution to your 401k to offset it.

  • Nick

    Hi kira,

    Not sure if your still responding on here, but I have a question. When i withdraw the mony i need from my traditional ira for my doen payment on my fha loan does the ira company take out the tax’s for me state and fedral? Also if my down payment is 7500 and i owe 25% in taxes do i withdraw a total of 10,000? I also want to make a seperate withdraw to pay off some credit card debt, would i make a seperate withdraw for that or should i combine it in one withdraw? thank you for your help.

    NIck

    • Nick

      I am in the state of california.

    • Kira Botkin

      Some companies will allow you to elect to set aside some of your withdrawal for taxes, but if you don’t, all you do is declare it on your income taxes at the end of the year and pay the penalty and income taxes then.

      You don’t have to withdraw money from the IRA in order to pay the taxes, but if you know you won’t have the money to pay the taxes unless you get it out of the IRA, you can do that. Just keep in mind that you will also be taxed on the money you are withdrawing to pay the taxes with.

      If you want to withdraw some other money to pay off debt with, you can do that at the same time or separately, doesn’t matter. This will all come out in the wash next April when you do your taxes (although it sounds like getting them done for you might be a good idea, if you have never done this before.)

      Your state is also going to levy income taxes on this money, but as far as I know there aren’t any states that levy additional fines on early IRA withdrawals.

  • uwasp44

    Hey Kira,

    We live in Wisconsin and my husband just got a new job in Iowa. We put our home on the market and will be looking for a new house in Iowa. We have some money in our “emergency savings” but don’t want to use it for the down payment. He has around $5800 in his 401k so instead of rolling it to the new job, we thought about just cashing it out to use as the 3% down payment on the new house. Is this a good plan or should we just take a loan from the 401k?

    Jessica

    • Kira Botkin

      No no no! If you cash out the 401k directly, you have to pay the 10% penalty plus income tax on it. Roll that 401k over to a traditional IRA and THEN withdraw the $5800. That will save you $580 because you won’t have to pay that 10% penalty later. Given that he is leaving his job, taking a 401k loan might not even be an option since many companies won’t let you do it if you no longer work for that company.

      • uwasp44

        So can we withdraw from a traditional IRA to use as a downpayment on a second house or is it only for first time home buyers. We are trying to sell the first and buying a second where the new job is.

        • traynor98

          did you ever find out the answer to this?

        • Kaz

          The answer’s in the article. It’s only for first time home buyers. If the husband bought the first house and the wife buys the second, it would work, but not if it’s just a new house, and not the first house for either.

        • Kira Botkin

          They asked it in a new comment at the top of the thread.

  • uwasp44

    So can we withdraw out of a traditional IRA for a 2nd house downpayment, or is it only for first time home buyers? We are trying to sell our first house and want to buy a second where the new job is.

    • Kira Botkin

      It is only for first time homebuyers unless there is a gap of several years between the homes.

  • PS

    Hello Kira,
    Me and my wife are buying our first home. We have individual traditional IRA’s which we both plan on withdrawing to use against the down payment ($10k each). My wife has around 20k in her 401k. Can we take a loan against her 401k as well even if we plan on withdrawing from the IRA.

    Also would it be wise to rollover the money from traditional to Roth IRA before withdrawing it.

    Please advice.

    • Kira Botkin

      That sounds like a pretty good plan! You can take a loan from your 401k if the plan servicer allows it for any reason and it isn’t affected by whether you are also withdrawing from your IRA for any reason. I wouldn’t bother rolling over the money because either you’re paying income taxes on the amount of money rolled over, or you’re paying income taxes on the amount of money withdrawn, so it’s a wash.

  • Lou Sellers

    Hi Kira, I will be 62 in the month of August. I do have a 401k and i continue to work with the co.
    I am considering withdrawing my 401k to add with my down payment. Will i be be penalty-free?
    or will the 10% rule apply to me as well

    • Kira Botkin

      You can only withdraw from an IRA penalty-free for a home, not a 401k. Since you are still with the company, you can’t roll your 401k over into an IRA, so while you can withdraw some money, you will still have to pay the 10% and income tax.

  • Tvkumar_g

    Hello Kira,
    This is a nice article for a first time home buyer. I am looking to take out 10k from my TD IRA. IS there a way to skip paying taxes by repay the amount to my IRA account just like 401k.

    • Kira Botkin

      Only if you put the money back within 60 days, and it’s a bit of a hassle but can be done (as a type of rollover.)

  • Pake3

    WHAT IF IT IS YOUR SECOND HOME? – AND YOU SOLD YOUR PREVIOUS HOME EARLIER IN THE SAME YEAR – DUE TO DIVORCE?

    • Kira Botkin

      Then you’re not a first-time homeowner, having already owned a home recently. Doesn’t matter why you sold it if it was less than five years ago.

  • chicagofire59

    I am 53, divorced and have money that I rolled over from a 401k to an IRA from the divorce along with money in my work’s 401k. I want to buy a house and put a down payment on it but I have no liquid cash to do so. If I take out of my IRA or 401k to do so, how much will I be penalized and would it be better to take from one or the other if I have no other options for a down payment of $15,000.00?

    • Kira Botkin

      It sounds like you rolled over all of your 401k money to IRAs and thus don’t have any 401k money left. As long as you haven’t owned a home in the last five years, you can take out up to $10k for a home purchase without paying the 10% early withdrawal penalty, but you will still need to pay regular income taxes. If you take out more than $10k you’ll owe the penalty on the extra $5k.

  • http://twitter.com/MorgansMemes Morgan Berg

    Hi Kira,

    This was such a helpful article – wish I would have found it before sifting through the 590 which still has left me with some questions! I’m no longer working for the employer that I started my Roth 401k and Simple IRA with (both over 5 years ago) and my current employer doesn’t have a retirement plan. I’m a first time home buyer. I have two related questions:
    1. Can I roll over a portion of my Roth 401k into a NEW Roth IRA and then take an early
    distribution for my down payment without being taxed or penalized as long as I keep it
    under $10K?
    2. Or, if that doesn’t work, can I roll over a portion of my Roth 401k to the existing Simple IRA
    and then withdraw it for the down payment and not be taxed or penalized?

    Thanks for any additional assistance you can provide, and again, great job with this article!

    • Kira Botkin

      I’m not terribly familiar with the Roth 401k but I will take a shot. In a normal Roth IRA you can withdraw contributions whenever you want, tax and penalty free. You can then also withdraw up to $10k of earnings for a home purchase, tax and penalty free. Whether that division between contributions and earnings is maintained after a rollover, I am unsure.

      So the question to #1 is yes, you should be able to do that. At minimum you’d be able to take out $10k without tax or penalty. You might also be able to take all of your contributions and up to $10k of your earnings, if the division between them is maintained after the rollover, and you want to withdraw more.

      As for question #2, I’d say, why would you? The SIMPLE IRA is a pre-tax account (ie you don’t pay taxes on that money.) Your Roth IRA is a post-tax account (ie you have already paid taxes on that money.) If you roll over your Roth IRA into a SIMPLE IRA, you might have to pay taxes on it again when you withdraw it. You should always roll a Roth 401k into a Roth IRA.

      • http://twitter.com/MorgansMemes Morgan Berg

        Thanks so much for your prompt response Kira!

        Regarding question #1, my only concern was that it was my understanding that in order for it to be a qualified distribution of earnings from a Roth IRA that the account needed to have been in existence for a minimum of 5 years (in addition to all of the other caveats for 1st time home buyers). So I didn’t know if funds that I contributed to and earned on a different account over five years ago would fall within that on a new account. Then again, I could be completely off my rocker – like I said, that 590 is a bear and this stuff is SO out of my comfort zone!

        Regarding question #2, my preference would certainly be not to do that, but if option 1 (Roth 401k –> Roth IRA) didn’t work, I thought this might be a way to still avoid (or at least lessen) the taxes and penalties for early distributions.

        Again, thanks so much for your help. It is truly appreciated and oh, so needed!

        • Kira Botkin

          I honestly have no idea if the aging of the money would carry over between accounts. If I were doing this, I’d go ahead and do it and keep documentation of the age of the Roth 401k, and if the IRS sent me a letter about it they’d probably take that documentation as proof that the money, if not the account, is old enough. Remember that the IRS is not out to get you – frequently they’re just looking for clarification of possible errors thrown out by the automated system.

  • Moreal Mm18

    Can I withdraw from my 401k for a down payment plus new furniture etc? Or does it HAVE to be just the down payment?

    • Kira Botkin

      You must use the money towards the purchase of the house. There are no additions allowed.

  • Alex

    While it is true that the traditional IRA will be taxed at withdrawal and the Roth IRA will not, when you retire, the same will be true. Hopefully on a larger scale. Seems like that should go into the considerations.

  • nate

    so ive seen a lot of partial answers in my situation, but no smoking gun. i have a 401k with a relatively low balance with a former employer (profit sharing). we are looking to purchase/build a house and of course would like some extra money.

    should i bother with trying to roll out my 401k to something else, or should i just take the cash?

    if i understand it correctly, because the plan is with an old employer, i skip the 10% penalty but still owe Fed taxes. i currently reside in KY (moving to OH) and may (?) avoid any sort of state taxes.

    the move would happen fairly quick (next 4-6 mo) as my new job is 40 miles away (long commute), so waiting for any sort of maturity (roth) isnt really an option.

    thanks.

    • Kira

      I’m not clear on where the idea came from that who holds the 401k changes the fact that it is a 401k. There is no break on withdrawing money from a 401k for a home purchase. It’s only from an IRA. And it will still be treated as income and most likely be subject to state tax in states that have an income tax.

  • kordawg

    Kira, I currently own a home but my wife and I want to purchase a new home and this time will buy a home together (she is not the first home nor has ever been). She is a first time home buyer, so under the rule can I withdraw from my IRA for her to give as 10K down payment?

    • Kira Botkin

      No, sorry, she’d have to buy it alone in order for this to qualify.

  • JON M.

    Help Please! Wife has $13k in M&I 401k from previous employer (left in 2010), currently in process of buying whats considered to be first time home per FHA standards (have not owned within 3yrs)(have owned home in past though pre 2009) We have the money for down payment in the bank, but would like to use that 401k money for improvements after close (closing estimated around 9/7/12 so we only have 2.5 weeks) but we dont want to get killed on taxes/fees by cashing out. Can we follow the steps 401k to IRA then cash out around our closing or after closing? The money will go in the house, but im just worried about timing.. Whats best option? THANK YOU!

    • Kira Botkin

      Well, I think this guideline requires it to be five years, but if you hurry you can get this done. You might want to call the servicer you want to roll it to and ask if they think they can get it done in that time period, and pay the fee to have it wired to reduce the time the money takes to get to you.

  • Dane

    Hello I have a Traditional (9k) and roth(3K) IRA rolled over from my employers previous 401k. I would like to EMPTY both accounts for a down payment on my first home is this possible/is this wise/any suggestion? I currently have a 401k from a new employer?

    • Kira Botkin

      Sounds like a good plan to me. You should be able to withdraw the balance of both accounts, without paying penalties on either, but you will still pay income tax on the traditional IRA’s balance. You might want to check that the Roth is old enough to withdraw penalty-free however, I’m not sure if aging transfers during a rollover. Your new 401k has no bearing on this matter.

      • AK

        Thanks for all the info Kira. Additional question: does the exemption apply for houses outside the U.S.? I am looking to buy a place outside (and will be here for at least two years) but not sure whether IRS allows home purchases outside the U.S. to be exempted.

  • MichaelM

    Thank you for the article, it was very helpful. My question is if my wife and I are both first time home buyers, can each of us withdraw $10,000.00 from our individual IRA or IRA ROTH accounts? Thanks.

    • Kira Botkin

      I haven’t been able to find anything specific on this, but from what I have read that should be fine.

  • frazz

    When you withdraw money for the downpayment on a 1st time home purchase do you need to file anything immediately or do you wait until year end when filing taxes? I want to make sure I am not missing any steps to avoid the penalties.

    • Kira Botkin

      You wait until you file your taxes normally. Your IRA servicer will send you a form with the withdrawal noted. You might want to have an accountant do the taxes for you this year if you are nervous about it.

  • Renee

    Hi – I live in Canada and have a small 401k from the US (I have dual citizenship and moved back to Canada 4 years ago). Can I use my 401k money to purchase a house? What would be the penalties/fees for doing this? Thanks

    • Kira Botkin

      Again please note there is no break on penalties for using 401k money to buy a home – you have to roll it into an IRA first.

      If you are trying to purchase a home in Canada with the money, I have no idea and I would check with a Canadian tax advisor. If you are trying to purchase a home in the US with the money, you can’t get the break on penalties because you have to live in the home.

  • Tracy

    Hi Kira – My husband and I are buying our first home and want to use my 401K for the down payment. If I’m not on the loan (I have a judgement on my credit from previous divorce), am I still able to get a withdrawal to help with the down or do I have to be on the loan? Thank you.

    • Kira Botkin

      Well, it kind of comes down to how it’d go if you got audited. If you’re going to be on the title to the home, you might be able to get that by. But really, if you’re not on the loan, you’ll have a harder time convincing them the money went to the house.

  • http://profile.yahoo.com/QS2HHEBGHJBJ7Z7NJNIDZUZLSU snowman

    how do you determine if you are a first time homebuyer? we bought the house we are in when my wife and I were engaged. all the money came from me but we are both on the title. does that disqualify her as a “first time homebuyer”?

    • Kira Botkin

      Yes.

  • Boyemom

    I have a 401k from my previous employer that I have not rolled over.. $35k. I have a new 401k from my current employer but haven’t contributed as much. I am first time home buyer and need 10k towards downpayment. What’s the best way to get the 10,000 out?

    • Kira Botkin

      You only get a break on fees when you withdraw from an IRA, and you can’t roll over a 401k from a company you still work at. So you should roll your previous employer’s 401k over into an IRA and take out the $10k from there. You will still owe income tax on the $10k but won’t be assessed the 10% early withdrawal penalty.

  • Jason

    Kira My wife has a Traditional IRA that we plan on withdrawing money from to purchase land to build a new house. Two questions. 1. Can we avoid penalty on 10k of it if we use the money for raw land? 2. Can we each get the 10k penalty break from the SAME IRA for a total of 20k penalty free? Thank you so much!

    • Kira Botkin

      1. Nope. Has to be a place you can live. You could probably use the 10k on the loan to build the house, though.
      2. Yes, if you’re both first-time homebuyers, you can both take out 10k IF this is a joint IRA. If it’s only hers, only she can take money out anyway.

  • Lauren

    so my financial advisor just told me that in order to take the 10K out of my IRA for a new home that I would need to use all other liquid money out of my accounts first or with the 10K for the purchase…is that correct? That sounds ridiculous!

    • Kira Botkin

      Well, it might be financially smarter to use up other liquid assets on which you won’t have to pay income taxes, but there is certainly no rule against it, and I wouldn’t personally want to walk out of a home closing with no cash in my accounts to buy new curtains with.

  • http://www.facebook.com/barnabas.path Barnabas Path

    I have read through your article and the 107 comments posted here so I woudl like to tell you my situation, my understanding of what I can do, and ask if I have it correct.

    My wife and I are pre-approved for an FHA loan with a down-payment as low as 5%. I have 3 existing 401-K accounts from previous employers. I have a 401-K account with my current employer. I have a SEP and an IRA held with B of A that were both created while I had a small business. My wife has an IRA in her name and also a 401-K from her former employer. She is not employed and has not been employed for 12 years. Finally she has a small equities account with Ameritrade. We have no liquid reserves other than the retirement funds (I know, shame on me; long story).

    Ideally I would like to use a traditional loan however our credit rating (low 700) does not make the 740 cut for less than a 20% down; a 20% down would be perilous and risky especially since I can only borrow 50% on the current 401-K (this has grown at a more rapid pace due to matching, and catch up deductions).
    So, it appears that I first need to decide if my cash flow can handle the 5% loan. Regardless of the downpayment elected, my first action would be to liquidate the stock fund and set aside the capital gains tax allowance. Next I need to roll-over the previous employers 401-K’s into a self-directed IRA (I wanted to do this anyway so as to have better investment control over those funds). Next I will borrow against my current 401-K.
    Q#1: I am not fully vested; will I be able to borrow against the full amount or only
    the vested amount?
    If the borrowed 401-K funds do not cover the down payment I will sell the rolled over 401-K amounts to cover the difference. I am over 59 so I expect that I will be able to avoid the 10% penalty.
    Q#2: Does this strategy make sense?

    • Kira Botkin

      In most plans you can only borrow against the vested amount.

      But the important thing to realize is that when you borrow against your 401k, those payments are going to be included in the calculation of how much of a loan the bank thinks you can afford – ultimately I don’t think it’s a smart move if you’re close to the edge on getting the size of loan you want. If you can’t afford the payments of the 5% down loan, and don’t have the cash on hand to bump it any higher, you may want to reconsider the size of the loan you’re taking out.

  • jessieg looking for a house

    My husband and I want to buy a new house (we will be selling our current house/first house which we recently realized we are no longer underwater with….). Anyway, we would like to use some of our savings and perhaps borrow from his 401K to make a down payment on the new house. Should we take a loan vs. a withdrawal from his 401K? The loan amount will be less than half of what he has in his 401K account, but more than $10K. What do you advise? We also have a traditional IRA that could cover the loan amount if necessary, but we were hoping to avoid paying a penalty since we can pay back the loan in January of 2014 (only 7 months away). Please advise.

    • Kira Botkin

      To be honest, if you can pay back the loan in seven months, I’d wait seven months and then start shopping for the new house. If you have a barely not-underwater house to sell, you may actually lose money selling it after the 6% real estate commission. If you take a loan out of the 401k, you’ll affect your ability to get the new mortgage just like you would if you went out and bought a new car with a big car payment. And if you withdraw it, you will pay probably half that money to the government in the form of taxes and penalties. You only get to “pay it back” when the money is gone less than 60 days. I would wait and save your money if at all possible.

  • Karen

    I have 450K in a QDRO from a divorce (thus no 10% penalty for withdrawal). I have saved up 32K and still need another 38K. I am contributing 20K a year to my 401K and 3.2K to an HSA account. I’m thinking about taking out 40K from my 401K, 20K in Dec of this year and 20K in January of 2014, to divide the tax liability into 2 years. But my question is will it be a wash since I am contributing 20K in my 401K annually. Thanks for your input.

    • Kira Botkin

      In terms of taxes it should be a wash, but I’m confused if you are doing this for a first time home purchase – you can’t do the first time home purchase withdrawal twice in 2 months.

      • Karen

        thank you for your reply. Actually I am not a first time home buyer. Bought a home in 2005 but short sold in 2011. Can I still take money out of my QDRO?

        • Kira Botkin

          You can always take money out without the 10% penalty, though you will owe income tax. I’m just not clear as to what it has to do with this article?

  • dlcrush54

    My brother got part of his ex wife’s retirement as part of a divorce settlement (QDRO). He withdrew the money a little over a year later to pay down on another house. Will he have to pay penalties on this since it given to him in lieu of his half of the marital estate.

    • Kira Botkin

      You can withdraw from a properly established QDRO without paying the 10% early withdrawal penalty but he will still have to pay income tax on the money.

  • Deb B

    Your comment that a withdrawal of “$25,000 from your 401k will ‘wash’ with the $25,000 mortgage interest deduction and you will effectively pay no tax on it” is not wholly true. Taxpayers are entitled to a standard deduction even if they do not itemize, so only the amount of itemized deductions above the standard deduction, or above your current itemized deduction amount will offset the withdrawn 401K taxable income.

    For example, my husband and I used the 2012 MFJ standard deduction of $12,200; if we withdraw $25,000 from a 401K we’d have to have itemized deductions of $37,200 to offset that increased income to have a ‘wash’.

    From a long-term view, people may be better off with a 401K loan than a withdrawal (if they can afford the mortgage/repayment plan). Chances are, once they are in a new home they will procrastinate replacing the WD amount to their retirement account thru increased contributions, in favor of spending $ on their home. With forced repayment of a 401K loan they would have no choice but to re-invest in their retirement, and pay for home improvements/furniture only when their cash flow situation improves.

  • mistca

    My wife and I are under 40 and moving to another part of the state for work. We currently own our first home. She has a Simple IRA and i have a 401k. We want to withdraw $10k from each. Would that be a 10% fine on each + tax?

  • Tekem

    I have been reading online and no one really mention this but one could also borrow money from their life insurance policy. If one has a whole life or policy established from young, the cash that could be borrowed from it can be substantial. The only downside is if one doesnt pay the interest on time, or dies before payoff of the loan, it can affect the death benefit. If you have multiple policies from work, personal, then this less of a concern. Perhaps not everyone has a life insurance premium they are paying and hence the lack of discussion?

  • Sammy

    Hi Kira,

    I would like to withdrawal from my current employers 401k
    (through hardship) in the amount of 15k (fully vested) to put money towards the
    down payment of my first home purchase. I hope to do this earlier in the year where
    my mortgage interest will accumulate which could potentially help me pay $5,800
    in taxes and penalties (about 35%). Is this true? Let’s say if I accumulate
    about 15K in mortgage interest, could I potentially wipe out the $5,800 that I owe
    to the IRS?

    Also since I am a first time home buyer, and how can I apply
    the $10,000 of it to the first time home buyer? Or do I have to withdrawal 10k
    instead of 14k? Any guidance will be appreciated!

    Thanks,

    Sammy

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  • 2nd time home buyer in CA

    Not sure if you’re still responding to questions, but here goes: I currently have a 401K with a former employer that has roughly $60K in the account and we strategically did a proactive short sale on our first home two years ago and now preparing to get back into the housing market in May (credit back in the 750’s now). We would prefer to do a conventional loan at 20% down versus waiting another year to do an FHA loan and pay PMI. Most of the homes we’re looking at are in the in $350-400K range which means a down payment of $70-80K. I’m thinking about using the $60K in the 401K to apply towards the down payment. Should I first roll the 401K into a Roth IRA and then liquidate the Roth IRA account so I can avoid the 10% penalty? I also have a SEP IRA with Fidelity so I’m assuming that setting up a Roth IRA with them shouldn’t take too long and I can roll my 401K into the Roth that I set up with Fidelity. Does this make sense?

  • dave

    I lost my home as a result of divorce , I took a hardship withdrawal to purchase a foreclosed home and used the money for a down payment and put the rest in a construction account to make repairs on the home required by the bank. At 56 years old this was a great way to buy a house because I couldn’t afford a large mortgage because of the losses from the divorce I didn’t have enough money for a down payment. I had my taxes done and the withdrawal is counted as income and I am getting hit with a large tax bill which I cant afford , I thought I was doing the right thing to get back on my feet .this is very difficult to deal with , is there any way I can get a break from this tax bill ?

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  • Trina

    Can you take out money from your 401k to purchase a primary home if you already have a home but do not live in it?

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