401(k) withdrawals for home purchases: Pros, cons and alternatives
Quick insights
- Some employer-sponsored retirement plans may allow loans (such as certain 401(k) plans), depending on your plan’s rules.
- Using a 401(k) loan may allow you to borrow at a low interest rate without incurring a 10% early withdrawal penalty, but you’ll have to repay what you’ve borrowed or miss out on that income when you retire.
- There are alternatives to using your 401(k), including accessing other retirement accounts, low down payment loans and down payment assistance programs.
Saving up enough money to cover a down payment can be one of the most challenging barriers to homeownership. If you have a 401(k), 403(b), 457(b) or other tax-deferred retirement planOpens overlay , you may have money saved up that could be used to help cover a down payment for your home.
This article will help you figure out if you’re able to borrow from your retirement account, how to go about doing it and whether this is the right option for you.
What’s a 401(k)?
A 401(k) is also known as a tax-deferred retirement account. These accounts allow you to contribute a portion of your pre-tax income and invest it into the plan sponsored by your employer, where the savings can grow.
Many employers will also offer to match your contribution based on the amount you contribute. The amount you contribute is always 100% vested, but employer contributions may be vested on a graduated schedule.
Can you use your 401(k) to buy a house?
Yes. It’s possible to buy a house by taking money out of your 401(k). After all, it’s your money. However, 401(k) plans are designed for long-term retirement savings, not for easy withdrawals, so it’s important to remember the following withdrawal rules as dictated by the Internal Revenue Service (IRS)Opens overlay:
- If you withdraw money from your 401(k) before you turn 59.5, you’re subject to a 10% early withdrawal penalty.
- Money withdrawn from your 401(k) won’t earn interest and may not be there for you when you retire.
If you’re considering using your 401(k) for a home purchase, consider speaking with a financial advisor and tax professional to help you understand how the nuances will impact your specific situation.
How to use a 401(k) withdrawal for a house
If you do decide to use your 401(k) to buy a house, there are two ways to access the funds: a 401(k) loan or withdrawing directly from your account.
401(k) loan
Under IRS rules, the maximum 401(k) loan is generally the lesser of 50% of your vested account balance or $50,000. Some plans may allow loans of up to $10,000 even when 50% of the vested balance is lower, but plan rules vary. 401(k) loan limits depend on IRS rules and your plan’s terms. In many cases, the maximum is based on your vested balance and may be capped (for example, up to a certain dollar amount). Your plan may also set its own minimums and maximums, so confirm the amount you can borrow with your plan administrator.
Plan loans generally must be repaid through regular payments made at least quarterly and are typically required to be paid back within five years. Longer repayment periods may be available when the loan is used to purchase a primary residence, subject to plan rules.
It’s usually better to take out a loan against your 401(k) rather than cashing it out. This allows you to avoid the 10% early withdrawal penalty. Under IRS rulesOpens overlay, with a 401(k) loan, you can usually borrow between $10,000 and $50,000 from your 401(k), depending on the balance. You would then repay the amount in quarterly or monthly installments for a set period of time.
However, by borrowing against your 401(k), you may need to pay interest on the loan. So it’s a good idea to talk to a financial advisor and make sure you understand all the conditions before you borrow against your funds.
401(k) withdrawal
If you’re unable to take out a 401(k) loan, you may be able to withdraw the funds from your 401(k). But you’ll likely pay the 10% penalty for early withdrawal, unless you can qualify for a penalty exception. If you lost your home due to a federally declared disaster, you could borrow up to $22,000 without penalty.
Some retirement accounts (such as certain IRAs) may allow limited penalty exceptions for qualified first-time homebuyer expenses, but 401(k) distribution rules and penalty exceptions can differ by plan and situation. Before taking a distribution, confirm the specific rules and potential penalties/taxes with your plan administrator and a qualified tax professional.
Pros and cons of using your 401(k) to buy a home
Thinking about using your 401(k) to buy a home? It’s a good idea to consider the pros and cons. Of course, any decisions should be made based on the terms offered by your 401(k) provider and after consulting a financial advisor.
Pros of using a 401(k) to buy a home
- No credit check: Because you’re borrowing from yourself, you don’t have to worry about credit scores or other lender qualifications.
- Usually doesn’t affect your DTI: A 401(k) loan may not appear on your credit report the same way as other loans, but mortgage underwriting and DTI treatment can vary by lender and loan program. Your lender may still consider the required payments when evaluating affordability.
Cons of using a 401(k) to buy a home
- Loss of retirement savings: By taking money out of your 401(k), you risk missing out on years of growth while you’re paying back the money.
- Required repayment: Depending on your employer, you may need to repay the loan if you leave or lose your job before it’s paid back.
- Non-repayment penalties: If you’re unable to make your payments, you may risk penalties and taxes on the remaining balance.
Alternatives to using your 401(k) to buy real estate
If you’re reluctant to withdraw money from your 401(k) account, but are concerned about being able to afford a down payment, there are other options. These are just some ways to either secure a lower down payment or get funds to help you cover your homebuying costs.
IRA withdrawal
If you have an Individual Retirement Account (IRA), you may be able to withdraw funds from your existing balance. Unlike certain employer-sponsored retirement plans, IRAs generally do not permit loans.
Roth IRA withdrawal
If you have a Roth IRA, you can withdraw money without incurring penalties since the income you put into these accounts has already been taxed. However, to make a withdrawal, you need to have had the account for at least five years. You may also be subject to income taxes.
HomeReady® loans
These conventional mortgage loans from Fannie MaeOpens overlay allow homebuyers to pay as little as 3% down. To qualify, your income can’t exceed 80% of the area median income. Chase does not offer HomeReady® loans at this time.
Down payment assistance programs
Many states offer down payment assistance programs that can provide grants, forgivable loans and 0% or low-interest loans to homebuyers. You can learn more about these programs by contacting your state’s housing finance authority (HFA).
In summary
If you’re looking to buy a house and need money to cover your down payment, using the funds in your 401(k) or other tax-deferred retirement account is an option. However, it’s important to weigh the short-term costs of early withdrawal penalties and long-term costs of lost retirement income against the short-term benefits. It might be a good idea to talk with a tax specialist or financial advisor to better understand your options and the potential ramifications.
If you’re looking for loan options you can afford, get started on a mortgage application today. Our home lending advisors can help you choose a solution for your situation.
401(k) withdrawal for home purchase FAQs
Can I buy an investment property or second home with a 401(k) withdrawal?
You can withdraw money from your 401(k) to put toward the purchase of a second home or investment property. However, the money will likely be subject to the 10% penalty if you withdraw before age 59.5.
Can I take money from my 401(k) to buy a house without penalty?
You can typically avoid the 10% penalty if you use a 401(k) loan or if you borrow $10,000 or less using one of the allowed exceptions. Otherwise, you’ll be subject to the standard penalties and tax obligations.
Can you write off 401(k) withdrawal for home purchase?
If you withdraw money from your 401(k), it’s considered income and may be taxed accordingly.
