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

At the age of 65 you can use 401k funds to build a home if you are no longer employed. If you still work for the firm that sponsors your 401k then you may find that you cannot access your retirement funds for any purpose until you actually retire. When you withdraw money from your 401k, you have to pay taxes on your capital gains although you do not pay those taxes at the capital gains tax rate.

Capital Gains

When you invest money, any gains that you realize on your investment are classified as capital gains. In a taxable investment, you pay capital gains tax on realized gains on any investment that you have held for more than 12 months. Pensions, including 401k plans, work differently as you pay ordinary income tax rather than capital gains tax on your withdrawals. As of 2011, the long-term capital gains tax amounts to 15 percent, while ordinary income tax rates start at 15 percent and rise as high as 35 percent. Therefore you probably pay more in income taxes than you would if you paid capital gains tax. However, at 65 you do avoid paying the 10 percent tax penalty that you incur on 401k withdrawals made prior to age 59 1/2.


If you have yet to retire, your employer may or may not allow you to make withdrawals from your 401k. Under federal tax laws, employers can allow you to make "hardship withdrawals" when you encounter certain circumstances. The Internal Revenue Service classifies the paying of expenses toward the purchase of a primary residence as a type of financial hardship. In addition, some employers allow employees who have reached the age of 59 1/2 to make in-service withdrawals for any reason. If your plan does not include provisions for hardship or in-service withdrawals then you can't cash-in your 401k to cover costs related to the building of your home.


Some companies let you take out 401k loans and you have to use all available pension plan loan options before you can make a 401k withdrawal. You can borrow up to $50,000 from your 401k in the form of one loan or a series of loans and you can use the money for any purpose. With both loans and 401k withdrawals, you can only access vested funds, the account proceeds that actually belong to you. If your employer uses a vesting schedule for your 401k then it means that your employer's contributions only become yours after a period of between three and six years.

Roth 401k

Retirees aged 65 can access 401k funds without having to pay capital gains tax, tax penalties or even income tax but only if their pension plan took the form of a Roth 401k. With a Roth 401k, you invest on an after-tax basis and you pay no taxes on your earnings if you keep the money in the 401k for five years or more and wait to make withdrawals until you reach the age of 59 1/2. However, if you are still employed you can only access Roth 401k funds to cover the cost of building your home if your employer allows in-service withdrawals, hardship withdrawals or 401k loans.