Considering tapping your 401(k) to purchase a home? With home values at record levels and mortgage rates making it harder to qualify for affordable payments, many home buyers are looking to their retirement plans as an option to finally become homeowners.
Yes, you can tap your 401(k) to contribute to a down payment or closing costs, but it is not as easy as taking out cash. There are taxes, penalties, and regulations that will reduce your balance more quickly than you realize. And borrowing from retirement savings has long-term trade-offs that are not always so great.
In this guide, we’ll break down what happens when you take a 401(k) to buy a home, what the CARES Act permitted (and why it can no longer be done), and the alternatives that may save you dollars in the long term. That way, you’ll have the information to determine if it’s the best course of action or if your retirement should remain off the table.
How borrowing or withdrawing from a 401(k) actually works
Option 1: 401(k) loan
Many plans let you borrow from your account and pay yourself back with interest.
- Limit: typically the lower of 50% of your vested balance or $50,000 (with certain small-balance exceptions). Repayments are often due in five years, except when the loan finances a first home, where a longer term might be available.
- Perks: no 10% early-withdrawal penalty, no upfront income tax, and interest payments return to your account.
- Risks: if you quit your job, the loan becomes due rapidly; unpaid balances become taxable distributions (and a penalty of 10% if under age 59½). In addition, borrowed funds forgo market gains when they’re outside of your account.
Option 2: 401(k) withdrawal (distribution)
- You can withdraw cash, but withdrawals from a standard 401(k) before age 59½ are generally taxed as ordinary income and also subject to a 10% early-withdrawal penalty except in the case of an unusual exception. Withdrawals are therefore expensive. So if you take out $50,000 for a down payment, you’re already losing $5,000 in penalties, plus whatever your tax rate adds on top of that.
What about the CARES Act: does it let me withdraw penalty-free?
The CARES Act (2020) temporarily permitted coronavirus-related distributions of up to $100,000 without a 10% penalty and also provided beneficial repayment/tax treatment — but the provisions were temporary and have largely expired. Optional relief arrangements under plan amendments may still be available in some plans, but you shouldn’t expect CARES Act protections for a 2025 home purchase unless your specific plan specifically provides for it. Always check with your plan administrator.
Is there a first-time home buyer 401(k) withdrawal without penalty rule?
That is a vital distinction where many are confused: the $10,000 “first-time homebuyer” penalty exception is for IRAs, not 401(k) plans. Traditional or Roth IRAs permit a one-time penalty-free withdrawal of as much as $10,000 to use on a first-time home purchase — but a traditional IRA withdrawal will be taxable (Roth contributions can be withdrawn tax-free based on the five-year rule). 401(k) plans do not have the same $10,000 penalty exception, except if your plan takes special hardship rules (not common).
Surveys indicate that about 9% of recent homebuyers drew upon retirement savings for a down payment. Bottom line: don’t assume a 401(k) withdrawal for a first home skips the 10% penalty.
Pros & cons
Pros
- Fast access to cash (loan or withdrawal) when you need a down payment now.
- No credit check for a 401(k) loan; you’re borrowing from yourself.
- It can help you qualify for financing by showing higher assets or a down payment.
Cons
- Taxes and penalties: withdrawals often face income tax + 10% penalty (if under 59½).
- Lost compound growth: money taken out isn’t earning market returns for years.
- Job risk: if you leave your employer, a loan may come due fast.
- Repayment can limit contributions: some plans restrict new contributions while a loan is outstanding.
Safer alternatives to tapping your 401(k)
Before you touch retirement savings, consider these options — often cheaper in the long run:
- 401(k) loan instead of withdrawal: if your plan permits and you’re sure you’ll remain on the job long enough to pay back. Loans sidestep the 10% penalty and up-front taxes. Just watch out for job changes.
- Roth IRA contributions: You may withdraw your contributions (not profits) tax and penalty-free at any time. If you’ve been contributing to a Roth IRA, this can be a more generous source than a 401(k) payout.
- IRA first-time homebuyer exception: take out up to $10,000 penalty-free from an IRA for the purchase of a first-time home; taxes can still be due on traditional IRAs. This is a popular, simply defined choice.
- Down payment assistance programs & local grants: Most states, municipalities, and nonprofit organizations have first-time buyer programs that can lower or eliminate the requirement to dip into retirement accounts. Look in your local housing authority.
- FHA / VA / USDA loans: lower down-payment options and more flexible credit rules can keep you from needing a big retirement withdrawal.
- Gifts or family loans: documented gifts from family members are often an accepted way to fund down payments without penalties.
- HELOC or home equity (if you already own a home): tapping existing home equity can be cheaper than a 401(k) withdrawal.
Practical steps if you still plan to use your 401(k)
If, after weighing alternatives, you still think a 401(k) loan or withdrawal is your best path, do this:
- Talk to your plan administrator: verify whether your plan allows loans, the repayment rules, and any restrictions on contributions during repayment.
- Run the math: compare net cash after taxes/penalties (if withdrawing) versus the lost future value of the investment. Consider a conservative expected return (e.g., 5–7%) to see long-term impact.
- Stress test your plan: what happens if you lose your job or rates rise? Could you still meet mortgage payments?
- Document everything: lenders and underwriters will want to see the source of funds and repayment plans.
- Talk to a tax pro: determine the actual tax bill from a withdrawal and whether any state rules change that number.
Short checklist: When a 401(k) move might make sense
- You can’t access other low-cost financing.
- You have no other down-payment assistance or gift options.
- You plan to repay a 401(k) loan quickly and won’t leave your employer.
- You understand and accept the retirement growth you’re giving up.
If those boxes tick, then a 401(k) loan could be a pragmatic (but not risk-free) move. Withdrawal? Only in extreme circumstances or with expert tax planning.
How A&P Lending Titans Can Help
At A&P Lending Titans, we know that each homebuyer’s finances are different. Rather than urging you to dip into your retirement fund, we help you locate loan programs that accommodate your present budget. Whether that’s an FHA mortgage with low down payment options, VA assistance for our military families, or creative financing alternatives that leave your 401(k) intact.
Our multilingual staff has assisted many clients through their choices without sacrificing their future finances. We are committed to getting you into your dream home today while preserving your future to live comfortably tomorrow.
Ready to discover your home-purchasing potential without sacrificing your retirement? Call A&P Lending Titans at 702-277-4994 or stop by 8495 W Sunset Rd Ste. 102, Las Vegas, NV 89113. Let’s discover a way to homeownership that safeguards your future.