Using retirement funds to secure a down payment for a house may seem appealing, particularly when saving enough money for a home purchase proves challenging. However, financial experts urge caution before making this decision.
While 401(k) plans and Individual Retirement Accounts permit homebuyers to access or borrow limited amounts from their retirement funds for down payments, this approach carries substantial tax consequences and potential long-term financial repercussions.
“Planning is the name of the game here,” Stephen Kates, a financial analyst at personal finance website Bankrate, said. “Running the numbers, having a solid understanding of what you can financially cover and financially manage is going to be really important before you step into this.”
Rising inflation, elevated mortgage interest rates, and soaring housing costs have created significant barriers for American homebuyers. However, the S&P 500 has experienced only five negative years from 2005 to 2025, boosting retirement account values considerably.
Fidelity Investments reports that average 401(k) account balances reached $146,400 by December 31, representing a substantial 66% increase over ten years across 24.8 million accounts. Meanwhile, average IRA balances hit $137,095 at year’s end, marking a 51% rise since late 2015 across 18.9 million accounts.
Despite these gains, many savers still lack sufficient funds for home down payments. Redfin’s analysis shows the median December down payment reached $64,000 nationwide.
In contrast, median balances for retirement accounts tell a different story: $34,400 for 401(k) plans and $10,476 for IRAs as of December 31, according to Fidelity. These median figures typically appear lower than averages because newer participants haven’t accumulated substantial balances yet.
Realtor.com analysis reveals that typical American households needed seven years to accumulate down payment funds last year, an improvement from the 12-year peak in 2022 but still double pre-pandemic timeframes.
National Association of Realtors data shows 46% of homebuyers between July 2024 and June 2025 used personal savings for down payments, including 59% of first-time purchasers. Alternative funding sources included family assistance, inheritance money, or proceeds from investment sales.
However, retirement fund withdrawals remained uncommon. Only 6% of all buyers and 11% of first-time purchasers accessed 401(k) or pension funds for down payments, while 3% withdrew from IRA accounts.
Prospective homebuyers must evaluate how retirement fund withdrawals will impact their future financial security.
“Most likely, somebody who’s taking money out of the 401(k), they’re going to have to retire later than they otherwise would have, especially if they’re taking a relatively large portion of their balance,” Kates said.
Most 401(k) programs permit loans for primary residence purchases, though repayment terms and requirements vary by plan.
IRS regulations restrict 401(k) loans to 50% of vested account balances or $50,000, whichever amount is smaller.
Account holders with balances under $10,000 may borrow their entire amount if their plan administrator permits.
Borrowers should carefully evaluate the consequences of retirement fund loans.
Borrowed amounts require repayment, creating additional monthly obligations alongside homeownership expenses including mortgage payments, insurance premiums, and property taxes.
The most significant 401(k) loan risk occurs when borrowers lose employment before completing repayment.
Under these circumstances, outstanding balances become taxable distributions. Borrowers under 59 and a half years old also face an additional 10% tax penalty.
Additionally, retirement savings suffer because unpaid loans cannot be repaid.
The IRS allows 401(k) hardship withdrawals for specific financial circumstances, including medical expenses, funeral costs, education expenses, and primary residence purchases.
Unlike loans, hardship withdrawals don’t require repayment but permanently reduce retirement savings. Individuals more than six months from age 60 face 10% tax penalties plus regular income taxes on withdrawn amounts.
“The best option of the two that are available — either the loan or the hardship withdrawal — the loan is the more preferable option, because you can borrow from yourself, you’re going to pay yourself back with interest,” Kates said.
IRA accounts function differently from 401(k) plans. While they prohibit loans, IRAs allow penalty-free withdrawals up to $10,000 for home purchases, even for individuals under 59 and a half, provided they qualify as first-time homebuyers.
Like 401(k) withdrawals, IRA users must balance immediate fund access against reduced retirement income.
Potential homebuyers should consult financial planners and retirement plan administrators before making withdrawal decisions, regardless of account type.
