You have some viable options: taking a loan from your 401(k) or making a withdrawal. Each one comes with different rules and costs, and one might hurt your future retirement savings more than the other.

Before you touch that retirement money, you need to know what you're giving up and whether there are better options for you, such as capitalizing on first-time homebuyer down payment assistance. The house you buy today shouldn't come at the expense of having enough money when you retire.

For informational purposes only. Always consult with a financial advisor before proceeding with any real estate transaction.

Tips for Homebuying With a 401(k)

• Yes, you can use 401(k) money to buy a house through loans or withdrawals
• A 401(k) loan lets you avoid penalties if you pay it back within five years
• Taking money out early costs you a 10% penalty plus income tax if you're under 59½
• First-time homebuyers can take out $10,000 without the penalty (but still pay income tax)
• Using retirement money means less savings for your future

How 401(k) Withdrawals and Loans Actually Work

You have three main ways to use your 401(k) for a home purchase:

Option 1: 401(k) Loan. You can borrow up to $50,000 or half of your vested balance, whichever is less. This is the standard limit. You must pay this back within five years.

The good news? No taxes or penalties if you follow the rules. The bad news? Your retirement savings take a hit.

Option 2: 401(k) Withdrawal. This means taking money out completely. If you're under 59½, you'll pay a 10% penalty PLUS regular income tax. That's a BIG chunk of your money gone right away.

Option 3: Hardship Withdrawal. Some 401(k) plans allow "hardship withdrawals" specifically for buying a primary residence, but this won’t work if you’re buying a vacation home. These are still taxed as regular income, but depending on your employer's plan rules, the 10% penalty might be waived in some cases.

The SECURE Act 2.0 has slightly more flexible rules for hardship withdrawals.

First-time homebuyers might want to look at IRA withdrawals instead—they have better terms than 401(k) plans. With IRAs, first-time homebuyers can withdraw up to $10,000 penalty-free (though you'll still owe income tax).

Every 401(k) plan has different rules. Before making any decisions, call your plan provider and ask about their specific loan or withdrawal options.

Good and Bad Points of Using 401(k) Money for a House

Good Points

• Get cash right away for your down payment
• No credit check needed since it's your money
• No early withdrawal penalty if you take a loan (not a withdrawal)
• Interest payments go back into your account

Bad Points

• Less money saved for retirement
• Miss out on compound growth
• Pay income tax plus a 10% penalty on withdrawals if under 59½ (living in a 55+ community doesn’t necessarily preclude you from the penalty)
• Strict repayment terms—most loans must be repaid within 5 years
• If you change jobs, you have until your next federal tax filing deadline (including extensions) to repay the loan or roll it over
• While repaying, you might pause new contributions and lose employer matching

Smart homebuyers look into other options first, like down payment assistance programs and different types of first-time homebuyer loans. These can help you buy a home without cutting into your retirement savings.

Tax Costs and Penalties You Need to Know

If you're under 59½ and take money out of your 401(k), two things happen:

1. You pay a 10% early withdrawal penalty
2. You pay income tax on the amount you take out

The first-time homebuyer exception ($10,000 without penalty) applies ONLY to IRAs, NOT to 401(k) plans. With 401(k)s, you'll still face the 10% penalty plus income tax unless you're over 59½. Be sure to look into the IRS’s exceptions to tax on early distributions to ensure you’re making the right decision for you.

401(k) loans work differently. You avoid penalties and taxes if you pay back on time. But if you can't repay the loan, it counts as a withdrawal, meaning penalties and taxes kick in.

Roth 401(k)s work a bit differently:

• You can withdraw your contributions (the money you put in) tax-free and penalty-free
• But earnings (the growth on your money) still face regular taxes and early withdrawal penalties if taken out before age 59½

Always talk to your plan provider and, if possible, a tax professional before withdrawing money from your 401(k). The tax rules can get complicated quickly.

Other Ways to Get Down Payment Money

Before tapping your retirement savings, look at these options:

Traditional IRA Withdrawal: First-time homebuyers can take up to $10,000 without penalties. You'll still pay income tax, but it might be better than using 401(k) funds.

Down Payment Assistance Programs: Many growing states and cities—from Nashville, Tennessee, to Austin, Texas—offer grants or low-interest loans to help with down payments. These programs won't hurt your retirement savings at all.

Down Payment Assistance Programs with Low Down Payments:

• FHA Loans: Government-backed with just 3.5% down, work with lower credit scores
• HomeReady and Home Possible: Special Fannie Mae and Freddie Mac programs with as little as 3% down
• First-Time Homebuyer Grants: Many states offer funds you don't have to repay
• VA Loans: Zero down payment for veterans and service members

Personal Savings or Family Gifts: The old-fashioned way still works best. Save up over time or ask family for help.

Wait a Little Longer: Sometimes the best move is to keep saving for another 6-12 months. One of the most common mortgage mistakes is pulling the trigger too soon, and a bigger down payment means smaller monthly payments later.

How This Affects Your Retirement Money Long-Term

Taking money from your 401(k) now means less money later—often MUCH less. Here's why:

• You lose the power of compound growth. A $10,000 withdrawal today could mean $54,274 less at retirement (assuming 7% returns over 25 years).
• Even 401(k) loans have hidden costs. While you're repaying the loan, you might reduce or stop new contributions. If your employer matches contributions, you lose that free money.
• The younger you are, the bigger the impact. Money taken out in your 30s misses decades of potential growth.

Think about it this way: Is having a house now worth having thousands less during retirement?

For informational purposes only. Always consult with a financial advisor before proceeding with any real estate transaction.

Should You Use Retirement Money for a House?

Using your 401(k) for a house is like borrowing from your future self. Sometimes it makes sense, but it comes with real costs.

Before going through the home-buying process with funding from retirement savings, be sure to:

• Calculate exactly how much the withdrawal or loan will cost in taxes and penalties
• Estimate how much retirement money you'll miss out on long-term
• Look into ALL other options for down payment funds
• Consider whether you can catch up on retirement savings later

For some buyers, using retirement funds might be the only way to buy a home now. The best approach is to talk to a financial advisor who can examine your specific situation and help you make the smartest choice for today and tomorrow.