Using Your 401(k) for a Down Payment on a Home: What You Need To Know

With the housing market stubbornly stuck, policymakers are looking for ways to help buyers clear the biggest hurdle to homeownership: cash up front. And now, President Donald Trump is weighing an option that would allow more Americans to tap their 401(k) retirement savings to buy a home.

The announcement comes at a critical time for homebuyers. The typical first-time homebuyer is now 40 years old, according to the National Association of Realtors®—a dramatic shift from the 1980s, when first-time buyers were often still in their late 20s. For many households, the down payment remains the gatekeeper; Realtor.com® estimates it takes the typical buyer seven years to save enough to put money down.

Meanwhile, many younger workers are sitting on a considerable chunk of cash. Empower data shows the median retirement savings of someone in their 20s is nearly $40,000, with an average closer to $128,000. 

But these workers may not need to wait for President Trump’s new plan to be finalized. Under certain conditions, you can already access 401(k) funds for a down payment. The real question is whether you should.

How to use your 401(k) for a down payment

There are two main ways to tap your 401(k) for homebuying today: taking a loan from your account or making an early withdrawal. Both can help you access cash quickly, but the financial consequences are very different depending on the path you choose.

401(k) loan: The ‘lesser of two evils’

A 401(k) loan is exactly what it sounds like: a way to borrow from your own retirement and repay it over time. 

It’s the “lesser of two evils,” according to Eric Croak, a certified financial planner and president of Croak Capital, because you avoid many of the penalties that come with an early withdrawal.

But there are limits. The exact rules will depend on your employer’s plan, but many cap how much you can borrow based on your vested balance (typically 50% of your vested balance or $50,000, whichever is less) and require repayment within a set timeframe (say five years) with interest.

Even with these stipulations, a 401(k) loan comes with the major advantage that you can avoid the immediate tax hit that comes with an early withdrawal, and the interest paid goes back into your retirement account. 

“At least the loan gives you a way back,” says Croak.

But if you’re buying a house, those payments can strain your monthly budget right when homeownership costs are rising. In your first year especially, you’re likely to face unexpected expenses like repairs, maintenance, moving costs, and higher utility bills.

And if you leave your employer before the loan is fully repaid, the remaining balance may become due right away. 

“If you lose your job before paying it back, the loan can become due immediately,” warns Croak. If you can’t pay it back in time, the unpaid amount may be treated as a distribution, triggering income taxes and possibly penalties.

In other words, a 401(k) loan may be reversible in theory, but it can tighten your cash flow and put you in a vulnerable position if your employment situation changes.

The ‘bonfire’ option: early withdrawal

The more damaging way to use a 401(k) for a down payment is through an early withdrawal. Not only will you owe ordinary income taxes on the amount you withdraw, but as Croak notes, you can also face a 10% early-withdrawal penalty in many cases.

That can make a large withdrawal end up as a much smaller deposit. For example, a $100,000 early withdrawal can shrink to just $66,000 after accounting for the 10% penalty and income taxes—before you even factor in the tens of thousands of dollars in lost compounding, according to a basic early withdrawal calculator.

And it’s that loss of compounding power that becomes the much bigger for most 401(k) holders. It can take years to rebuild your balance, and in the meantime, you lose out on the growth that would have happened if those dollars had stayed invested. In the same example above, a 35-year-old who withdraws $100,000 early would miss out on more than $76,000 in compound growth by retirement age, assuming they retire at 72.

Croak puts it plainly: The penalty is “only the beginning,” because an early withdrawal also reduces your liquidity and leaves you with less flexibility if you hit a financial setback later.

“Basically pouring money on a bonfire,” he says, “because you want a house that you may only stay in for a few years.”

Jason Dall’Acqua, a financial advisor and founder of Crest Wealth Advisors, agrees: “While tapping into your 401(k) might provide additional resources when buying a home, it does also come with an opportunity cost of reducing your retirement savings and compounding growth over time,” he says.

Instead of focusing on the short-term gain, Croak urges buyers to zoom out and consider what they’re giving up. 

“Those sacrificed funds have the potential to multiply into many times that original withdrawal amount,” he explains. “Borrowing from yourself is stealing from your future safety net.”

The only two times it might make sense

For most buyers, using a 401(k) for a down payment should be treated as a last resort, but there are still two scenarios in which it can make sense, according to Croak.

The first is when buyers have no meaningful savings outside of retirement and no viable alternative to come up with a down payment. In this situation, tapping a 401(k) may be the only path to avoid staying stuck a renter indefinitely or to getting into a stable housing payment you can afford.

It's an all too familiar scenario for many homebuyers today. The typical American has just $8,000 in savings and checking accounts, according to data from the Federal Reserve—well below the typical down payment of roughly $30,000 today, according to data from Realtor.com. For these buyers, tapping a 401(k) comes with risk, but it also comes with huge upside if they're able to find a home they can stay in for many years, build equity, and avoid variable rent payments.

The second is when your overall financial picture is strong (i.e. no other debt and strong future earnings potnetial) and the home purchase is substantially discounted. If the stars align for a purchase like this, it offers the rare opportunity to lock in low housing costs that can allow you to put more of your future earnings into retirement and make up the difference from your loan or withdrawal.

But this is a more unlikely scenario for today's homebuyers. Even as home prices are set to slow in 2026, home prices overall remain well above their pre-pandemic norms.

Again, these are the exceptions, not the rules. If you have the option to keep renting while you build savings, that can be the safer bridge than pulling from retirement and trying to make up lost ground later.

A simple decision rule readers can actually use

If you’re trying to decide whether tapping your 401(k) is “worth it,” here’s a straightforward rule of thumb: Don’t touch retirement money unless you know how you’ll undo the damage quickly.

Both Croak and Dall'Acqua warn that retirement accounts are easy to drain and hard to rebuild. If you can’t realistically replace the money within the next one to two years through higher contributions or dedicated savings, it may be too risky.

Even then, Dall’Acqua’s advice is to take the smallest amount possible, not the maximum your plan allows. The goal is to bridge a gap, not fund the whole down payment with retirement dollars.

And don't forget to stress test your monthly budget, especially if you’re taking a loan. You need to know exactly what your payment looks like with the loan repayment included, and whether you can still afford the basics of homeownership, including repairs, insurance increases, and higher utility costs.

If the numbers only work in a perfect scenario, it’s not a stable plan.

What to do instead

If tapping your 401(k) is starting to look like the only way to buy, make sure you've exhausted the following options first.

The first is an obvious one: Reduce the target. That can mean aiming for a smaller down payment than you originally hoped, shopping at a lower price point, or prioritizing a home that fits your budget comfortably even if it’s not your ideal pick. 

While a 20% down payment has long been considered the gold standard for homebuying, the typical down payment is much closer to 15%, according to data from Realtor.com

Another approach is to extend the runway. If you’re close but not quite there, renting a little longer while building nonretirement savings can be the safer bridge. It’s slower, but it keeps your long-term financial foundation intact.

It’s also worth investigating assistance options before you touch retirement funds. Many buyers qualify for some form of help they didn’t realize existed, whether through local initiatives, lender programs, or employer-linked benefits.

Some cities, like Pawnee City, NE, are even offering up to $50,000 in down payment assistance to entice residents to move there.

Finally, consider whether your current plan is forcing you into the hardest version of the market. You may be able to improve your odds by changing your strategy or location. That can mean targeting less competitive neighborhoods, looking at different property types (like townhomes or manufactured homes instead of single-family units), or expanding your search radius.

The point isn’t to compromise forever, but to avoid making a long-term retirement decision just to survive a short-term bidding environment.