According to Rocket Mortgage, it isn’t illegal to withdraw money from your 401(k) to buy a house or to pay for any other expense, but it’s also isn’t advisable in many cases.
One of the biggest arguments against withdrawing 401(k) funds early is that you’ll likely be hit with a 10 percent early withdrawal penalty if you’re under the age of 59.5 years old—or 55 in the case of jobless individuals. Also, you’ll have to pay any applicable income tax on the 401(k) distribution.
There are exemptions to the early withdrawal penalty. Spending the 401(k) money on home buying experiences for a principal residence could qualify you for these exemptions, according to Rocket Mortgage. However, the company warns that qualifying for those exemptions is difficult, especially because you’ll likely be disqualified if you have other assets that could go toward your home purchase.
Either way, you’ll also have to contend with the loss in potential 401(k) growth. Investopedia said, “If you have $20,000 in your account and take out $10,000 for a home, that remaining $10,000 could potentially grow to $54,000 in 25 years with a 7-percent annualized return. But if you leave $20,000 in your 401(k) instead of using it for a home purchase, that $20,000 could grow to $108,000 in 25 years, earning the same 7-percent return.”