Can You Take & Use Your 401(k) to Build a House Without Paying High Capital Gains at Age 65?

After saving for their retirement using a 401(k) plan, some people want to cash in on their hard work. At age 65, you can withdraw from your 401(k) plan to build a house. While you can avoid paying capital gains taxes on money withdrawn this way, you will still be taxed on your 401(k) withdrawal at your ordinary income tax rates, unless the account is a Roth 401(k), even if you're using the 401 (k) to buy a home.


At age 65, you can spend the money in your 401 (k) however you'd like, including using your 401 (k) to buy a house after retirement. However, you will not have to pay capital gains taxes on these retirement funds, but if you're under age 65, you may face a 10 percent early withdrawal penalty.

Taxable as Income

Money inside of your traditional 401(k) account can come from many different sources, including the original contributions, interest income, dividends or capital gains from the sale of stock. Regardless of how the money went into the account, all money that comes from your 401(k) through withdrawals is taxed as income, at your ordinary income tax rate.

Individual income tax rates vary from 10 percent to 39.6 percent for the 2017 tax year, and from 10 percent to 37 percent for the 2018 tax year, depending on your income level. Capital gains rates, by contrast, are always lower than your income tax rate, but these never apply to withdrawals from a 401(k).

Minimum Retirement Age

The minimum age that you can usually withdraw from a 401(k) without incurring an additional tax penalty of 10 percent is age 59 1/2, but there are certain exceptions to this rule. For example, if you are age 55 and have retired or been laid off, you can withdraw money from your 401(k) without paying a penalty as well. At age 65, withdrawals are allowed, but you do not have to withdraw from a 401(k) until you reach age 70 1/2, or retire from the company, whichever is later.

Tax Implications

At age 65, you can use your 401k to buy a home or for whatever reason that you desire, without paying a tax penalty on the money, but you can't escape the income tax. And remember: any large withdrawal might bump you into a higher income tax bracket for the year. For example, suppose you are married filing jointly for the 2017 tax year, with a taxable income of $50,000, and you take $200,000 out of your 401(k) to build a house. With a taxable income of $250,000, you've moved from the 15 percent tax bracket to the 33 percent bracket, meaning that your 401(k) withdrawal is subject to a bigger tax bite than the rest of your income.

Alternative Options

If you're 65 but planning to continue working for a few more years, a 401(k) loan might be an option. Many 401(k) plans allow you to borrow against your account, paying the money back over time, with interest. You pay the interest to yourself, and it is deposited into your 401(k) account with the payments. In addition, you pay no taxes on the loan amount as long as you keep making the payments and stay employed. If you leave employment, however, you must pay the loan back within 60 days, or pay taxes on the entire loan amount, as well as any additional penalties assessed.