401(k) withdrawals for home purchases: Pros, cons and alternatives
Quick insights
- You can borrow against your 401(k) or other retirement accounts to cover a down payment for your home.
- Using a 401(k) loan may allow you to borrow at a low interest rate without incurring a 10% early withdrawal penalty, but you’ll have to repay what you’ve borrowed or miss out on that income when you retire.
- There are alternatives to using your 401(k), including accessing other retirement accounts, low down payment loans and down payment assistance programs
Saving up enough money to cover a down payment can be one of the most challenging barriers to homeownership. If you have a 401(k), 403(b), 457(b) or other tax-deferred retirement plantypes-of-retirement-plans-december-2024, you may have money saved up that could be used to help cover a down payment for your home.
This article will help you figure out if you’re able to borrow from your retirement account, how to go about doing it and whether this is the right option for you.
What’s a 401(k)?
A 401(k) is also known as a tax-deferred retirement account. These accounts allow you to contribute a portion of your pre-tax income and invest it into the plan sponsored by your employer, where the savings can grow.choosing-a-retirement-plan-february-2025choosing-a-retirement-plan-february-2025
Many employers will also offer to match your contribution based on the amount you contribute. The amount you contribute is always 100% vested but employer contributions may be vested on a graduated schedule.choosing-a-retirement-plan-february-2025choosing-a-retirement-plan-february-2025
Can you use your 401(k) to buy a house?
Yes. It’s possible to buy a house by taking money out of your 401(k). After all, it’s your money. However, 401(k) plans are designed for long-term retirement savings, not for easy withdrawals, so it’s important to remember the following withdrawal rules as dictated by the Internal Revenue Service (IRS):
- If you withdraw money from your 401(k) before you turn 59.5, you’re subject to a 10% early withdrawal penalty. considering-a-loan-from-your-401(k)-planconsidering-a-loan-from-your-401(k)-planconsidering-a-loan-from-your-401(k)-plan
- Money withdrawn from your 401(k) won’t earn interest and may not be there for you when you retire.
If you’re considering using your 401(k) for a home purchase, consider speaking with a financial advisor and tax professional to help you understand how the nuances will impact your specific situation.
How to use a 401(k) withdrawal for a house
If you do decide to use your 401(k) to buy a house, there are two ways to access the funds: a 401(k) loan or withdrawing directly from your account.
401(k) loan
It’s usually better to take out a loan against your 401(k) rather than cashing it out. This allows you to avoid the 10% early withdrawal penalty. Under IRS rules, with a 401(k) loan, you can usually borrow between $10,000 and $50,000 from your 401(k), depending on the balance. You would then repay the amount in quarterly or monthly installments for a set period of time.retirement-topics-plan-loansretirement-topics-plan-loansretirement-topics-plan-loansretirement-topics-plan-loans
However, by borrowing against your 401(k), you may need to pay interest on the loan. So it’s a good idea to talk to a financial advisor and make sure you understand all the conditions before you borrow against your fundings.
401(k) withdrawal
If you’re unable to take out a 401(k) loan, you may be able to withdraw the funds from your 401(k). But you’ll likely pay the 10% penalty for early withdrawal, unless you can qualify for a penalty exception. There are numerous exceptions, including:
- First-time homebuyer 401(k) withdrawal: If you’re a qualified first-time homebuyer, you can withdraw up to $10,000 toward your down payment without incurring the 10% penalty. However, you’ll still need to pay income taxes on the withdrawal.early-withdraws-from-retirement-fundsearly-withdraws-from-retirement-fundsearly-withdraws-from-retirement-fundsearly-withdraws-from-retirement-fundsearly-withdraws-from-retirement-funds
- Disaster recovery 401(k) withdrawal: If you lost your home due to a federally declared disaster, you could borrow up to $22,000 without penalty.early-withdraws-from-retirement-fundsearly-withdraws-from-retirement-fundsearly-withdraws-from-retirement-fundsearly-withdraws-from-retirement-fundsearly-withdraws-from-retirement-funds
Pros and cons of using your 401(k) to buy a home
Thinking about using your 401(k) to buy a home? It’s a good idea to consider the pros and cons. Of course, any decisions should be made based on the terms offered by your 401(k) provider and after consulting a financial advisor.
Pros of using a 401(k) to buy a home
- No credit check: Because you’re borrowing from yourself, you don’t have to worry about credit scores or other lender qualifications.
- Lower interest rates: According to Experian, borrowing from a 401(k) usually has lower interest rates than other types of loans.401(k)-loan-vs-personal-loan401(k)-loan-vs-personal-loan401(k)-loan-vs-personal-loan401(k)-loan-vs-personal-loan401(k)-loan-vs-personal-loan401(k)-loan-vs-personal-loan
- Usually doesn’t affect your DTI: A 401(k) loan isn’t counted as debt by credit reporting bureaus. That means it won’t affect your credit score and usually isn’t included in your debt-to-income ratio. 401(k)-loan-vs-personal-loan401(k)-loan-vs-personal-loan401(k)-loan-vs-personal-loan401(k)-loan-vs-personal-loan401(k)-loan-vs-personal-loan401(k)-loan-vs-personal-loan
Cons of using a 401(k) to buy a home
- Loss of retirement savings: By taking money out of your 401(k), you risk missing out on years of growth while you’re paying back the money.
- Required repayment: Depending on your employer, you may need to repay the loan if you leave or lose your job before it’s paid back.
- Non-repayment penalties: If you’re unable to make your payments, you may risk penalties and taxes on the remaining balance.
Alternatives to using your 401(k) to buy real estate
If you’re reluctant to withdraw money from your 401(k) account, but are concerned about being able to afford a down payment, there are other options. These are just some ways to either secure a lower down payment or get funds to help you cover your homebuying costs.
IRA withdrawal
If you have an Individual Retirement Account (IRA), you can also choose to withdraw or borrow against your existing balance. However, the IRS states that you would be subject to a 10% penalty unless you qualify for the first-time homebuyer exception. Like 401(k) loans, this exception limits you to $10,000 without incurring a penalty.early-withdraws-from-retirement-fundsearly-withdraws-from-retirement-fundsearly-withdraws-from-retirement-fundsearly-withdraws-from-retirement-fundsearly-withdraws-from-retirement-funds,401(k)-loan-vs-personal-loan401(k)-loan-vs-personal-loan401(k)-loan-vs-personal-loan401(k)-loan-vs-personal-loan401(k)-loan-vs-personal-loan401(k)-loan-vs-personal-loan
Roth IRA withdrawal
If you have a Roth IRA, you can withdraw money without incurring penalties since the income you put into these accounts has already been taxed. However, to make a withdrawal, you need to have had the account for at least five years. You may also be subject to income taxes.early-withdraws-from-retirement-fundsearly-withdraws-from-retirement-fundsearly-withdraws-from-retirement-fundsearly-withdraws-from-retirement-fundsearly-withdraws-from-retirement-fundsearly-withdraws-from-retirement-funds
FHA loans
If you can pay at least 3.5% down, you may qualify for a Federal Housing Administration (FHA) loan. These loans allow homebuyers with lower credit scores to qualify, but they require you to pay extra in mortgage insurance premiums (MIPs), both upfront and over the life of the loan.
HomeReady® loans
These conventional mortgage loans from Fannie Mae allow homebuyers to pay as little as 3% down. To qualify, your income can’t exceed 80% of the area median income.mortgage-lender-fact-sheetmortgage-lender-fact-sheetmortgage-lender-fact-sheetmortgage-lender-fact-sheetmortgage-lender-fact-sheetmortgage-lender-fact-sheetmortgage-lender-fact-sheet Chase does not offer HomeReady® loans at this time.
Down payment assistance programs
Many states offer down payment assistance programs that can provide grants, forgivable loans and 0% or low interest loans to homebuyers. You can learn more about these programs by contacting your state’s housing finance authority (HFA).
In summary
If you’re looking to buy a house and need money to cover your down payment, using the funds in your 401(k) or other tax-deferred retirement account is an option. However, it’s important to weigh the short-term costs of early withdrawal penalties and long-term costs of lost retirement income against the short-term benefits. It might be a good idea to talk with a tax specialist or financial advisor to better understand your options and the potential ramifications.
If you’re looking for loan options you can afford, get started on a mortgage application today. Our home lending advisors can help you choose a solution for your situation.
401(k) withdrawal for home purchase FAQs
Can I buy an investment property or second home with a 401(k) withdrawal?
You can withdraw money from your 401(k) to put toward the purchase of a second home or investment property. However, the money will likely be subject to the 10% penalty if you withdraw before age 59.5.considering-a-loan-from-your-401(k)-planconsidering-a-loan-from-your-401(k)-planconsidering-a-loan-from-your-401(k)-plan
Can I take money from my 401k to buy a house without penalty?
You can typically avoid the 10% penalty if you use a 401(k) loan or if you borrow $10,000 or less using one of the allowed exceptions. Otherwise, you’ll be subject to the standard penalties and tax obligations.early-withdraws-from-retirement-fundsearly-withdraws-from-retirement-fundsearly-withdraws-from-retirement-fundsearly-withdraws-from-retirement-fundsearly-withdraws-from-retirement-funds
Can you write off 401k withdrawal for home purchase?
If you withdraw money from your 401(k), it’s considered income and may be taxed accordingly.early-withdraws-from-retirement-fundsearly-withdraws-from-retirement-fundsearly-withdraws-from-retirement-fundsearly-withdraws-from-retirement-fundsearly-withdraws-from-retirement-funds
