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Many retirees wonder if they can tap into their 401(k) savings to buy or build a house without triggering taxes. However, even at age 65, there is no completely tax-free way to use traditional 401(k) money for a house purchase.

After age 59 and a half, you can withdraw funds from your 401(k) without facing the 10% early withdrawal penalty. However, withdrawals from a traditional 401(k) are still considered regular income, not capital gains and are taxed accordingly.

How 401(k) Withdrawals Are Taxed at Age 65

The IRS treats traditional 401(k) withdrawals as ordinary income. Therefore, if you withdraw any amount to build a house, that amount will be added to your total taxable income and taxed at your current rate. However, there is no separate capital gains tax on 401(k) withdrawals because you are not selling an investment; you are drawing from a retirement account funded with pre-tax dollars.

But the good news is that you will not have to pay any early withdrawal penalty at age 65, which usually applies to those under age 59 and a half.

Roth vs. Traditional 401(k)

If your savings are in a Roth 401(k), you are in a much better position. Qualified distributions from a Roth 401(k) are completely tax-free after you have held the account for at least five years and are above age 59 and a half. That means you can withdraw funds for a house at age 65 without paying taxes or penalties.

With a traditional 401(k), you will owe income tax on every dollar withdrawn. Therefore, before you start writing checks to contractors or realtors, take a close look at which type of 401(k) you have and what that means for your tax bill.

What About Taking a 401(k) Loan?

Instead of withdrawing funds outright, some retirees consider borrowing from their 401(k). This can be a smarter move if your plan allows it. Generally, a person can borrow up to 50% of their account balance, or $50,000, whichever is less. The advantage is that you do not have to pay income tax or early withdrawal penalties on the borrowed amount, as long as you repay it on time.

Another perk is that the interest you pay goes back into your own account and not to a bank. However, repayment terms are strict. The loan taken against 401(k) account must be repaid within a period of five years, and if you fail to do so, the unpaid amount will be treated as a taxable withdrawal. So, while it is a flexible option, it comes with financial discipline requirements.

Better Alternatives to Using Your 401(k)

Before you dip into your retirement savings, it is worth exploring other ways to fund your house purchase or construction. One option is tapping into an IRA. Traditional IRAs allows a person to withdraw up to $10,000 without incurring any penalty to buy their first house. While you will still owe income tax on that money, avoiding the 10% penalty can make a difference.

You can also look into federal or state programs that make house buying easier for older adults or first-time buyers. FHA and VA loans, for instance, offer low down payments and easier qualification terms. Many states also run down-payment assistance programs that provide grants or zero-interest loans to help cover upfront costs.

These alternatives can help you keep your retirement savings intact while still achieving your housing goals.

Should You Use Your 401(k) to Build a House?

Using your 401(k) for a house can be tempting, especially when you have a substantial balance and a dream project in mind. But it is crucial to weigh the long-term trade-offs. Every dollar withdrawn from your retirement account stops earning compound growth — which makes 401(k)s so powerful over time.

If you are determined to use your 401(k), consider consulting a tax advisor or financial planner first. They can help you structure withdrawals in a tax-efficient way, determine how much you can afford to withdraw and evaluate whether borrowing instead of withdrawing makes sense for your situation.

At age 65, the rules are more flexible, but the decisions carry lasting financial consequences. With thoughtful planning, you can balance your housing dreams with a secure and sustainable retirement.