It’s a common question:  “Can I use my 401k to buy a house?”

People see that bulging 401k balance and realize that it’s enough for that home down payment–a down payment they may not otherwise be able to cover–and the mental gears start turning…  Hmmm…  Maybe I can use a chunk of my nest egg to buy this property…

Well, the short answer to the question is, “Yes, you can use your 401k to buy your house.”

Of course, you can also use the money in your 401k to buy new clothes, a boat, a stake in a minor league baseball team or a stack of lottery tickets.  Your 401k money is your money.  You put it in there and you can take it out.  You can spend it on anything you’d like.  That includes using it to make a down payment on a home.

The bigger (and more important) question is whether you should use your retirement set aside as a means making that down payment.  Even if that’s not what most people asking the question want to know, it is what they need to know.

The answer to that more important query?  No.  In most cases you should not use your 401k to buy a house.

Here’s why.

First, it defies the entire point of having the 401k in the first place.  You set up the account and have funded it in order to prepare for your eventual retirement.  That’s why it’s there.  That’s why the tax implications are set up the way they are, too.  The whole reason you’ve been diverting payroll into your 401k is to provide for your golden years.

If you’re thinking of turning your back on that objective to make a home down payment, it’s a sign that you are thinking in the short-term (getting the house right away) instead of maintaining your smart long-term commitment.  A little patience and an exploration of other ways to cover that down payment make more sense.

Second, if you yank that dough from your 401k, you’re going to experience the punishment that goes along with impatience.  As mentioned, 401k’s are designed to facilitate retirement earnings.  If you start pulling out money for purposes unrelated to that objective, you’re not going to get taxed on the proceeds.  You’re also looking at paying penalties, too.

The government has set up tax incentives for saving until retirement because that’s what they want 401k’s to accomplish.  A 401k isn’t a savings account.  If you want to soak up the advantages associated with the account, you need to treat it like a retirement account.

Withdrawals are an obvious no-no.  Borrowing against the money in your 401k can be just as bad.  401kPlanning.org notes:

With a hardship withdrawal you will pay taxes, penalties and forgo future earnings on the money you withdraw. A 401k loan is less costly – you forgo earnings amount borrowed – but still quite risky in the context of your overall financial and retirement plan. A major risk with borrowing from your 401k is the risk of job loss. If you lose your job, or change employers, you generally must pay back the loan in full within 60 days. Otherwise, the loan is treated as a withdrawal and subjected to the same taxes and penalties.

Third, you may have better options available.  You may be able to use a second mortgage and/or mortgage insurance to get the home with a reduced down payment.  If that won’t work, you might want to do the most sensible thing possible–saving up the money for the down payment.  There are other options, too.  In fact, BankRate has a nifty list of 10 ways to make that down payment.  One of them may provide you with a way to make things happen that won’t require screwing up your 4o1k.

So, that’s the bottom line.

Can I use my 401k to buy a house?  Definitely.

Should I use my 401k to buy a house?  No.  Probably not.

When push comes to shove, 401k’s exist for a specific purpose–to save for one’s retirement.  When you start trying to use them for other reasons, you’re probably going to be disappointed with the results.