Unless they've recently changed the law, using a premature distribution from your 401K is one of the few reasons that will exempt you from taxes and penalties for early withdrawal.

But...I agree with the direction shown by the other commenters here. It's really a terrible idea to trade your retirement savings for a house, and it's one of the many reasons why we got into so much trouble with the housing bubble. A lot of people who hadn't saved for a down payment were doing that, buying houses they couldn't otherwise afford, add in all the flipping that was going on, driving up demand and in turn driving up the price of housing. Mortgagors were encouraging people to borrow against their retirement or to make early withdrawals because regardless of what happens to you and your house, they get PAID. Don't fall for their bullshit when they say home prices can only go up and that NOW is the time to buy. They have a very vested interest in telling you that.

A house is no longer to be considered an investment. It's to be considered a place to call home. And I think that's a good thing.

So, in short, think of all the people who dipped into their retirement to buy a house that is now underwater. They have nothing and have to start all over.

Another issue is whether you're buying in the Seattle area.

From what I understand, despite the decline in housing values, it's still much more expensive to buy in the Seattle area than to rent. Under normal circumstances (where you've saved up a proper down payment), the tax savings and building of equity might still make buying in an over-inflated market worthwhile, but I'd be wary of taking a big hit in taxes and penalties *and* losing your retirement money when buying a still overpriced home.

If you're buying in the Seattle area and you're making (I think) 80 percent of median income, Homesight is a great option for borrowing a down payment, which you don't have to start paying off until you've paid off your mortgage.

This is a terrible idea."Certain penalties" are 10% plus you must pay income tax on the money. The tax savings for a mortgage are always less that the interest you pay. This helps defer the cost of the loan but isn't money in the bank. If your plan is to sell your house to fund your retirement, where are you planning to live?

Are you buying your first house? If so, you can go the FHA route and would need only 3.5% down--tax benefits of a house, a place to live, and you'd still have your retirement account (minus the early withdrawal and associated fees if this is what you needed to do to get a house).

If it's not your first house, do you have equity in your current home? It may be better to pull some equity for a down payment than tank your 401K.

Do you have an accountant or could you make a plan to see one? That's probably the best way to go for financial advice, as he/she could look at everything financial in your life with you and help you proceed.