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Can I use 401(k) money tax-free to buy a home?

April 13, 2013: 6:30 AM ET

Can I take money tax-free from my 401(k) for a down payment on a home? — Dev Ananth, Plano, Texas

You may be able to pull money out, but you can't avoid taxes. And that's not the only downside.

Most plans let you borrow half of your savings, or $50,000 (whichever is less); you'll repay that with after-tax dollars — not the untaxed dollars you contributed originally. Leave your job without repaying and you'll owe taxes on the balance, plus a 10% penalty if you're not yet 55. Your plan may also allow you to take a "hardship withdrawal" for a down payment, but you'd still owe taxes plus that 10%.

The problem in any case is that you sacrifice tax-free growth in your 401(k). "An early withdrawal can be one of the most detrimental financial moves you make," says Marina Edwards, a 401(k) consultant at Towers Watson. You're best off saving retirement money for retirement.

— Lauren Gensler

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