I have a 401K from a job I left ~7 months ago. I'm looking to buy some land and do construction on it. I need to put about $40K down on the land, but I only have ~$30K in savings.

What's the best way I can use the 401K to make up the difference?

Two things I'm considering:

  1. I could roll the 401K over into an IRA. Then I think I'd be allowed to withdraw $10K from the IRA, penalty free, as a "First Time Home Buyer". I have six questions about this though...
    Q1. Do I qualify for "First Time Home Buyer" in the first place?
        I already own a home I bought in November 2016. I've heard that
        despite the name, this limitation only applies if you've bought
        a home within the past 2 years though.
    Q2. What are the tax implications, and how can I most easily pay those
        taxes? IE, can I somehow take extra money out of the 401K to cover
        the taxes...? Or would I want to pay the taxes out of savings?
    Q3. What type of IRA would I want? I think there's both "Roth IRA"s
        and "Traditional IRA"s or something like that?
    Q4. How long would the money have to be in the IRA for before I
        could take it out?
    Q5. How much can I move from the 401K into the IRA?
    Q6. Does buying land, getting a construction loan, and rolling into
        a mortgage once construction is done qualify as a buying a home?
        Would it all have to be done in a single tax year?
  1. I could take out a loan against the 401K, right? Would there be tax implications for this? Would this be a qualified reason for taking a loan out against the 401K?

Thanks for any input.

  • 1
    First question: How old are you? That will determine what, if any, penalties apply
    – Machavity
    Dec 10, 2019 at 16:28
  • Does the $40K include the down payment for both the land and the construction? If not, I assume you're going to need additional funds to put down for construction. You may need more than just an additional $10K. (And that's if you're willing to take your savings to zero.)
    – TTT
    Dec 10, 2019 at 18:50
  • @Machavity - I’m 27. Not even halfway to being able to withdraw without penalty at 55 :) Dec 10, 2019 at 20:32
  • 1
    @TTT - Yes. The $40K covers 30% on the land plus 5% on the construction, which is what the lender wants. Dec 10, 2019 at 20:33
  • When did you first fund a Roth IRA (any Roth IRA, any source of funds including contributions, rollovers, conversions)?
    – Ben Voigt
    Dec 12, 2019 at 16:13

1 Answer 1


Do I qualify for "First Time Home Buyer" in the first place?

You don't qualify as a first-time home buyer. It doesn't have to truly be the first home you've purchased, but you can't have owned a house for the last two years.

I could take out a loan against the 401K, right? Would there be tax implications for this? Would this be a qualified reason for taking a loan out against the 401K?

Pretty confident you can't take a 401k loan out when you no longer work for the company that sponsored the plan, one of the big risks with 401k loans is that you have a short time period to pay the full loan back if you separate from the employer to avoid the 10% tax penalty.

You could roll this amount over to your new employer's 401k plan and take a 401k loan out from them, but may face a waiting period on the rolled over amount.

Similarly, you could just eat the 10% penalty and income tax and take an early distribution. I assumed you're not nearing retirement age, but if you are over 55 or will turn 55 yet this year then you can withdraw the funds from your old 401k without the 10% penalty and would just pay income tax at your normal rate on the distribution.

Rather than dipping into retirement accounts, I would suggest you discuss options with your lender to leverage equity in your current home, or delaying purchase until you've saved up enough.

  • 2
    Taking a distribution from your 401K would be terrible. Not the 10% but the fact that you can't put it back if you max out your 401Ks. That means you'll permanently miss the market growth, which pays such fantastic returns over the very long term. Dec 10, 2019 at 22:24
  • @Harper-ReinstateMonica Very true, not a lot of people are contributing the max to their 401k, but that likely means it's an even worse idea to take from it.
    – Hart CO
    Dec 10, 2019 at 22:27
  • 1
    If I knew then what I know now, I would live in my car to contribute the max to my 401K. Dec 10, 2019 at 22:28
  • @Harper-ReinstateMonica - What do you know now? I take the max of the employer match on the 401K, but I don't see the point in doing more. I expect the singularity to occur before I can withdraw without penalty (I'm 27 right now). Also, I'd like to retire before that age. And also, I expect my tax bracket to continue moving up. Maxing out my 401K seems pretty silly to me. Dec 11, 2019 at 15:03

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