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Writer's pictureKristen Philipkoski

Can I use my 401k to fund my home purchase down payment?

Updated: Jul 17



You might be tempted to borrow money from your 401k or other retirement savings to come up with down payment funds, especially considering that may be where the bulk of your savings lies. The median value of retirement savings in the United States in 2022 was $86,900, up a hefty 15% from 2019.  


The IRS allows you to either withdraw or borrow from your 401K retirement savings for a house down payment—it falls under “immediate and heavy financial need.” 


There are some positives: Since you are withdrawing your own money, lender’s don’t count it as debt when calculating your debt-to-income ratio. The loan or withdrawal also won’t count against your credit score. 


And if it’s your only way of gathering enough money for a down payment, you can access the money fairly easily. 


However, gathering a down payment via retirement savings comes with some drawbacks to consider before you go this route. Read on to learn more about each approach. 


Withdrawing from your 401k


Withdrawing money from your retirement savings for a mortgage down payment comes with some important drawbacks and risks. 


  • The government treats this money just like any other income you earn and will be taxed accordingly.

  • Since the money is considered income, it could bump you into a higher tax bracket, causing you to pay more taxes on all of your income. 

  • If you are under 59 and 1/2 years old, you will owe a 10% penalty on top of income taxes. 

  • You’ll lose years of tax-free savings that could be difficult to build back. You’ll also lose the compound interest that savings could have built over time.  


Borrowing from your 401k 


Specifically for a home purchase, you can borrow up to $50,000, or half of the amount in your account (whichever is less). You do pay interest on the loan, but it goes back to you rather than to a bank. It’s a better option than withdrawing outright, but there are several risks to be aware of. 


  • You’ll typically have five years to pay back the money you borrowed, paid quarterly. But if you leave your job, the money will likely be due with your next federal income tax return. If you miss the deadline, the loan will be considered an early withdrawal and the rules outlined above will apply. 


  • Some plans won’t allow you to contribute to your retirement funds again until you pay off the loan. This could lead to falling significantly behind on your retirement savings. 


  • If you go with borrowing from your retirement savings, make sure you can afford the payments along with your mortgage and other monthly debts.


Withdrawing from your retirement savings means sacrificing the tax-free income you had built up. If you withdraw and borrow from these funds, you’ll miss out on some of the compound interest the money could have earned. The result could mean that you don’t have enough savings when it comes time to retire. 


Using retirement savings might be a quick and fairly easy way to get the large sum necessary for a down payment. But to avoid the many pitfalls of this approach, start preparing for the costs of buying a home early, and consider other ways of funding your down payment, including opening a high-yield savings account, a CD account, or applying for down payment assistance as early in the home-buying process as possible.


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