Is It A Good Idea To Use Your 401k To Buy A House?

Your 401k is not only your nest-egg to retirement, but your 401k can also be used as a down payment to buy a house! Buying a home is a huge financial investment, so it’s important to understand all your options including using your 401k.

Buying a house is an exciting and emotional time, but it’s important to outline the big disadvantages that come with using your 401k to finance your home down payment.

This is an even bigger deal today than it was a few years ago. With 30-year mortgage rates now hovering around 6.49% (versus the 3% rates buyers enjoyed back in 2021), monthly payments are a lot heftier — so before you raid your retirement for a down payment, it’s worth running the full picture through our mortgage calculator to see what you’d actually owe each month.

Check your vested balance

The first thing to look into is how much of your 401k balance is actually vested. This is the amount that, hypothetically, if you left your work, you would leave with.

Every employer is different regarding how and when your contributions are vested. All employee contributions are 100% vested, however, employer match contributions may not be immediately vested depending on the employer.

The amount that is vested is the amount that you have access to and potentially withdraw and borrow from. That vested 401k amount you have access to can then be used to buy a house.

Withdrawing from your 401k

The first option is to withdraw the funds from your 401k as a Hardship Withdrawal. WIthdrawiing from your 401k is not taking a loan, so any money you take out is completely removed from your 401k retirement account.

Purchasing a home is one of the permitted reasons for making a hardship withdrawal.

Pros	Cons
You get your down payment covered	The money you withdraw loses any potential gains over time
It’s easy to qualify and get the funds quickly	You pay a 10% penalty if younger than 59½
	You pay income tax from the money you take out

The money you receive from your withdrawal not only incurs a penalty if you are younger, but it’s treated as regular income. This means that you pay income tax on that cash, so you lose out on quite a lot of money. Between the 10% penalty and the income tax hit, a hardship withdrawal is genuinely one of the most expensive ways to fund a down payment — often it makes more sense to keep saving in a regular account first.

Borrowing from your 401k

An alternative to withdrawing from your 401k would be to borrow from it instead. This is essentially taking a loan from yourself and paying it back over time.

Pros	Cons
You get your down payment covered	If you leave your job, the loan balance becomes due when you file your taxes next
You pay yourself interest on the money you borrow	You have to pay the loan, so that increases your monthly obligations
	The money you withdraw loses any potential gains over time

A big advantage to doing this is that you aren’t necessarily taking money completely out of your 401k. Instead, you borrow from yourself and the money you pay back is put back into your 401k.

The biggest downsides to doing this are that if you leave your employer, you either have to pay that balance back when you file your taxes next, or risk paying hefty fees and taxes on your withdrawal.

Check out 401k Loan – What You Should Know Before You Borrow

Final thoughts

So the question is Should you use your 401k as a down payment to your house?

The answer is It Depends. It depends entirely on your situation and financial goals. Looking at the advantages and disadvantages that come with taking out of your retirement can help you make an informed decision.

A smarter path for most people is to build the down payment outside of retirement so you never touch that nest egg. Set a target with our savings goal calculator, make sure you’ve got a separate cushion using the emergency fund calculator, and keep tabs on the whole picture — savings, debts, and net worth — with our free money dashboard. Your future retired self will thank you. :)