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If you are not at least 59.5, the only way to use your 401k money to purchase a home without incurring a penalty is to take a loan out against your 401k (if your employer permits loans). Otherwise, you would need to take an early hardship withdrawal from your 401k in order to use the funds from your 401k to purchase a home. Taking an early hardship withdrawal from your 401k will result in not only a 10% penalty, but you will be responsible to pay taxes on this money as well.

Here are the 401k early withdrawal rules:

A hardship withdrawal is not like a plan loan. The withdrawal may be difficult to get, and costly if you receive it. Remember, your 401k is meant to provide retirement income. It should be a last-resort source of cash for expenses before then.

Knowing that workers would resist putting aside money for decades with no chance to access it, Congress made provisions in the 401k rules to allow plan withdrawals in a limited number of hardship situations. These include:

• Un-reimbursed medical expenses for you, your spouse, or dependents.
• Purchase of an employee's principal residence.
• Payment of college tuition and related educational costs such as room and board for the next 12 months for you, your spouse, dependents, or children who are no longer dependents.
• Payments necessary to prevent eviction of you from your home, or foreclosure on the mortgage of your principal residence.
• For funeral expenses and repair of a primary residence.

But to discourage these early hardship withdrawals, in most all cases the IRS imposes a hefty financial penalty including a 10 percent early withdrawal penalty if you are younger than 59 1/2.

You may qualify to take a penalty-free withdrawal if you meet one of the following exceptions:

• You become totally disabled.
• You are in debt for medical expenses that exceed 7.5 percent of your adjusted gross income.
• You are required by court order to give the money to your divorced spouse, a child, or a dependent.
• You are separated from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turn 55, or later.
• You are separated from service and you have set up a payment schedule to withdraw money in substantially equal amounts over the course of your life expectancy. (Once you begin taking this kind of distribution you are required to continue for five years or until you reach age 59 1/2, whichever is longer.)

Employers are not required to offer any type of hardship withdrawal, so you should check with your employer to see if it is available to you.

http://www.401khelpcenter.com/401k_education/hardship_withdrawal_article.html

Here are a few ideas of ways to access your 401k money without penalty as well at the following links:

http://www.ehow.com/how_2075556_withdraw-401k-money-no-penalty.html

Tap your IRA without tax penalty You can withdraw up to $10,000 (once in a lifetime) from your IRA to buy a first-time home for yourself or for a family member. While not be subject to the IRS 10% early withdrawal penalty, normal taxes will still apply.

What if you don’t have an IRA? If you do not have an IRA, you can roll over into a “Rollover IRA” your retirement funds from previous employers where you had a qualified pension plan such as a

• 401(k)
• 403(b) tax-sheltered annuity plan
• Other qualified plan

http://www.investsafe.com/housefinancing.html

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