401k Rollover to Mortgage Down Payment 2025: IRS Rules + Strategy
Stuck saving for a down payment? You might have $50K-$100K sitting in your 401k right now. First-time homebuyers can access retirement funds penalty-free under IRS Rule 72(t) and the First-Time Homebuyer Exception. Here's exactly how to do it legally.
Unlock Your 401k for Down Payment
Access up to $50K from your 401k without penalties. See if you qualify and get your down payment instantly.
Check Your 401k Options →IRS First-Time Homebuyer Exception: $50K Penalty-Free
The IRS allows first-time homebuyers to withdraw up to $50,000 from their 401k penalty-free. This is a one-time exception that can save you thousands in penalties and early withdrawal taxes.
✅ IRS Rule 72(t) - First-Time Homebuyer Exception
- Max withdrawal: $50,000 (one-time)
- Penalty: 0% (no 10% early withdrawal penalty)
- Income tax: Still owed on the amount (taxed as income)
- Timeline: Must use within 120 days of withdrawal
- Qualification: Haven't owned a home in past 2 years
Calculate your tax liability before withdrawing to understand the full cost.
Who Qualifies as a First-Time Homebuyer?
The IRS definition of "first-time homebuyer" is broader than you think. You might qualify even if you've owned a home before.
✅ You Qualify If:
- You haven't owned a home in the past 2 years
- You're married and your spouse hasn't owned in past 2 years
- You're a single parent who hasn't owned in past 2 years
- You're buying your first home ever
- You're rebuilding after a disaster (divorce, foreclosure, etc.)
❌ You DON'T Qualify If:
- You owned a home within the past 2 years
- Your spouse owned a home within the past 2 years (if married)
- You're buying an investment property (must be primary residence)
- You're refinancing an existing mortgage
Verify your eligibility with your 401k plan administrator before withdrawing.
Tax Implications: How Much Will You Owe?
While you avoid the 10% early withdrawal penalty, you'll still owe income tax on the withdrawn amount. Here's what to expect:
💰 Tax Calculation Example
Scenario: Withdraw $50,000 for down payment
- Withdrawal amount: $50,000
- Early withdrawal penalty: $0 (first-time buyer exception)
- Income tax (22% bracket): $11,000
- Net received: $39,000
- Effective cost: $50,000 + $11,000 tax = $61,000 total
Pro tip: Withdraw in a year when your income is lower to minimize tax bracket impact. Consult a tax advisor for personalized planning.
Step-by-Step: How to Withdraw 401k for Down Payment
Step 1: Verify Your Eligibility
Contact your 401k plan administrator and confirm you haven't owned a home in the past 2 years. Get written confirmation of your eligibility.
Step 2: Request a Distribution Form
Ask your plan administrator for Form 1099-R (distribution form). Specify that this is a first-time homebuyer withdrawal under IRS Rule 72(t).
Step 3: Complete the Withdrawal
The plan administrator will process your withdrawal. You'll receive a check or direct deposit within 5-10 business days. Taxes will be withheld automatically.
Step 4: Use Funds for Down Payment
You have 120 days to use the funds for your home purchase. Get pre-approved for a mortgage and make your offer.
Step 5: File Your Taxes
When you file taxes, report the withdrawal on Form 1040. The income tax is due, but you'll avoid the 10% penalty. Keep documentation of your home purchase.
Alternatives to 401k Withdrawal: Other Options
Before withdrawing from your 401k, consider these alternatives that might save you money:
💰 1. 401k Loan (Better Than Withdrawal)
Borrow from your 401k instead of withdrawing. You pay yourself back with interest, and no taxes are owed.
- Max loan: 50% of balance (up to $50,000)
- Repayment: 5 years (or longer if buying primary residence)
- Interest rate: Prime + 1% (typically 8-9%)
- Tax impact: None (you're borrowing your own money)
Compare 401k loan vs withdrawal with your plan administrator.
🏠 2. Down Payment Assistance Programs
Many states and nonprofits offer grants and low-interest loans for down payments. You might get $5K-$25K free money.
- State first-time buyer programs
- Employer down payment assistance
- Nonprofit grants (no repayment required)
Find down payment assistance in your state.
📊 3. Lower Down Payment Options
You don't need 20% down. FHA loans allow 3.5% down, VA loans 0% down. This might be cheaper than withdrawing from 401k.
- FHA: 3.5% down, PMI required
- VA: 0% down (veterans only)
- Conventional: 3-5% down with PMI
Compare down payment options before touching your 401k.
401k Withdrawal for Down Payment: Pros vs Cons
✅ Pros
- No 10% penalty: Save thousands vs early withdrawal
- Large amount: Access $50K+ instantly
- Quick process: Funds in 5-10 business days
- One-time exception: Use it when you need it most
- Avoid PMI: Larger down payment = no PMI costs
❌ Cons
- Income tax owed: 22-37% tax on withdrawal
- Lost retirement savings: $50K won't grow for 30+ years
- Opportunity cost: $50K at 7% growth = $760K in 30 years
- One-time use: Can't use this exception again
- 120-day deadline: Must use funds within 4 months
Bottom line: Only withdraw from your 401k if you can't get down payment assistance or qualify for a low-down-payment loan. Explore all options first. Once you have your down payment, calculate your monthly payment to see the full cost.
Your Action Plan: Decide if 401k Withdrawal Makes Sense
- Check eligibility: Confirm you haven't owned a home in past 2 years.
- Calculate tax cost: Estimate your tax liability (22-37% of withdrawal).
- Explore alternatives: Check down payment assistance programs in your state.
- Compare options: 401k withdrawal vs 401k loan vs down payment assistance vs low-down-payment mortgage.
- Consult a tax advisor: Get professional advice before withdrawing.
- Get pre-approved: Get mortgage pre-approval and start house hunting.
Ready to Use Your 401k for Down Payment?
Understand all your options first. Explore down payment assistance and get pre-approved for a mortgage today.
Explore Your Options →Frequently Asked Questions
Can I withdraw more than $50,000 from my 401k?
The first-time homebuyer exception allows up to $50,000. You can withdraw more, but amounts over $50,000 will be subject to the 10% early withdrawal penalty plus income tax.
What if I'm married? Can both spouses withdraw $50,000?
Yes! Each spouse can withdraw up to $50,000 if both meet the first-time homebuyer criteria. That's up to $100,000 total for a married couple.
Do I have to use the funds within a certain timeframe?
Yes, you must use the funds within 120 days of withdrawal. If you don't use them for a home purchase within this window, you may owe the 10% penalty retroactively.
Is a 401k loan better than a withdrawal?
Generally yes. With a 401k loan, you borrow your own money and pay it back with interest. No taxes are owed, and your retirement savings stay invested. However, you must repay the loan or face tax consequences if you leave your job.
What if I don't use the funds for a home purchase?
If you withdraw the funds but don't use them for a home purchase within 120 days, you'll owe the 10% early withdrawal penalty plus income tax on the full amount. This defeats the purpose of the first-time homebuyer exception.
Can I use 401k funds for closing costs?
Yes, the first-time homebuyer exception allows you to use funds for down payment, closing costs, and other home purchase expenses. The key is that the funds must be used for your primary residence purchase.