LOS ANGELES (AP) — Raiding retirement savings for a down payment on a home can be tempting, especially if you’ve struggled to scrape together enough money to buy. But should you?
Most 401(k) and similar retirement savings plans like Individual Retirement Accounts (IRAs) allow homebuyers to withdraw or borrow a limited portion of their nest egg for making a cash payment toward the final purchase price, but there can be hefty tax penalties and other short- and long-term financial impacts to consider.
“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.”
Years of inflation, high mortgage rates and skyrocketing home prices have made buying a home a major hurdle for many Americans. At the same time, the S&P 500 stock market index has had only five down years between 2005 and 2025, which has helped juice the value of retirement savings accounts.
At Fidelity Investments, the average 401(k) balance based on 24.8 million accounts was $146,400 as of Dec. 31, a whopping 66% gain over a 10-year period, according to the company. And the average IRA balance based on 18.9 million accounts stood at $137,095 at the end of December, a 51% gain since the last day of 2015.
Still, many savers may have a ways to go before their accounts grow enough to fund a home down payment. The median U.S. down payment on a home in December stood at $64,000 , according to an analysis by Redfin.
Compare that to the median balance for 401(k) plans and IRAs as of Dec. 31: $34,400 and $10,476, respectively, Fidelity said. (Median figures tend to skew lower than the average because workers who recently enrolled in a retirement savings plan haven’t had time to build up a balance.)
Balancing between homeownership and saving for retirement
Last year, it took the typical U.S. household seven years to save for a down payment on a home, down from a peak of 12 years in 2022 but still roughly double the time it took before the coronavirus pandemic, according to an analysis by Realtor.com.
Some 46% of all homebuyers between July 2024 and June 2025 relied on savings to fund their down payment, according to the National Association of Realtors. That includes 59% of first-time buyers. Others got financial help from friends or relatives, or used money from an inheritance, proceeds from selling stocks or bonds.
Raiding one’s retirement savings, however, wasn’t a popular choice. All told, 6% of all homebuyers and 11% of first-time buyers tapped their 401(k) or pension to fund their down payment, while another 3% took funds from an IRA account.
Those who elect to take some of their retirement savings to buy a home need to consider how it would affect their finances once they retire.
“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.
Know your plan’s rules and limits
Most 401(k) plans allow participants to take out a loan toward the purchase of a primary residence, but there may be different requirements, for example, on how long the borrower has to pay it back.
The IRS also has rules that govern 401(k) plans. The agency limits loans to 50% of a borrower’s vested account balance or $50,000, whichever is less.
Savers with less than $10,000 in their plan can borrow the full amount, if their plan sponsor allows it.
Other factors to consider
Weigh the tradeoffs before taking out a loan against your retirement savings.
The funds you borrow need to be paid back, so you’ll have to budget for that payment, in addition to the costs that come with homeownership: mortgage payment, homeowners’ insurance, taxes, and so on.
However, the biggest risk with a 401(k) loan is what happens if you lose your job before paying it off.
In such a scenario, the unpaid balance becomes a distribution that the borrower has to report as taxable income. It’s also subject to an additional tax of 10%, unless the borrower is at least 59 years and six months old.
And, if that wasn’t painful enough, your retirement savings takes a hit because the loan isn’t getting paid back.
The hardship withdrawal option
The IRS permits 401(k) savers to make what’s known as a hardship withdrawal to help them cover specific financial needs, such as medical or funeral expenses, tuition and buying a principal residence.
This isn’t a loan, so you don’t have to pay it back, but it comes at a cost to your retirement savings. And if you are more than six months away from turning 60, you will face a 10% tax penalty on the funds, which are also taxable as regular income.
“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.
What about IRAs?
IRAs operate differently than 401(k) plans. They don’t allow loans but do permit savers to withdraw up to $10,000 without a 10% tax penalty, even if they’re younger than 59 and a half, as long as the funds are going toward buying a home and the saver is a first-time homebuyer.
As with 401(k) withdrawals, one must weigh the benefits of accessing the funds against the impact it will have on how much they have to live on when they retire.
Regardless of the type of retirement plan, aspiring homebuyers should consult with a financial planner and their retirement plan sponsor before making any decisions.
