Can I Use My 401(k) or IRA for My First Home Down Payment?

For many first-time buyers, a retirement account is the largest pool of savings they have. Tapping it can feel like the fastest path to a down payment. It can also cost more than it seems once taxes and lost growth are counted.

I'm Jeanette Nelson, a REALTOR® with Jeanette Nelson Real Estate, Keller Williams Realty, serving Orange County, Huntington Beach, Costa Mesa, Fountain Valley, and surrounding areas. This is general information, not tax or financial advice. A CPA or tax advisor can tell you how these rules apply to you.

If your plan offers loans, borrowing may be an option. The IRS notes that a plan may, yet is not required to, provide for loans, so check with your plan first.

According to the IRS:

• The most you can borrow is the lesser of $50,000 or the greater of $10,000 or 50% of your vested balance.
• Loans generally must be repaid within 5 years, with payments at least quarterly.
• A loan used to buy your main home may be paid back over a longer period.

A loan is not taxed when you take it out, as long as you follow the repayment rules. Ask your plan what happens to the loan if you leave your job, and ask your lender how the monthly loan payment affects your qualifying.

Some plans allow hardship distributions. The IRS lists "costs directly related to the purchase of an employee's principal residence (excluding mortgage payments)" as one of the safe-harbor reasons. Plans are not required to offer them.

There are real downsides:

• Hardship distributions are generally taxable as income, except for Roth contributions.
• They may also carry the 10% additional tax on early distributions.
• The IRS says you cannot pay the money back to the plan or roll it over.

IRAs have a specific first-home rule. IRS Publication 590-B explains:

• You can take up to $10,000 over your lifetime for a first home without the 10% additional tax, even if you are under age 59 and a half.
• If you and your spouse both qualify, each of you can use up to $10,000.
• The money must be used for qualified costs within 120 days of receiving it.
• You count as a first-time homebuyer if you had no ownership interest in a main home during the 2-year period ending on the date you buy.

For a traditional IRA, the money is still generally taxable as income. A Roth IRA can be different. Publication 590-B says a first-home distribution from a Roth IRA can be fully tax-free if you also meet the 5-year rule.

Yes. The California Franchise Tax Board explains that California has its own additional tax on early distributions, generally 2.5%. California does not follow every federal exception, so ask your tax advisor whether your withdrawal qualifies at the state level too.

Before you use retirement money, it can help to:

1. Compare all your options. Ask your lender about low down payment loans and assistance programs. Our guide to CalHFA's Dream For All covers one state program. Check the official page for what is open today.
2. Ask about documentation. Your lender will want to see where the money came from.
3. Think long term. Money you take out stops growing for retirement.
4. Plan for closing costs too. See what first-time buyers pay at closing.

If you're sorting through where your down payment will come from, I'd love to help you see the full picture of buying a home in Orange County, so you can make the call with your CPA and lender. Call or text me at 714.366.8575 | DRE: 01397168, or contact me.