Should You Use Your 401(k) to Buy a Home?

Can you use your 401(k) to buy a home — and should you?

Yes, you can access your 401(k) to help fund a home purchase. But before you tap into your retirement account, it's important to weigh the short-term benefits against the long-term costs. This guide breaks down how it works, your options, and whether it's the right move for you.

Two Ways to Use Your 401(k) for a Home Purchase

If you're buying a home and considering your 401(k) as a source of funds, you generally have two options:

1. 401(k) Loan

• Borrow up to $50,000 or 50% of your vested balance (whichever is less)

• No early withdrawal penalty or income tax

• You repay yourself (with interest) over time, typically via paycheck deductions

• Extended repayment timelines may apply if used to buy a primary residence

2. 401(k) Withdrawal

• No repayment required

• Subject to income tax, and if you're underage 59½, a 10% early withdrawal penalty may apply

• Withdrawn funds permanently reduce your retirement balance

Unlike IRAs, 401(k) plans don't include a first-time homebuyer exception for early withdrawals. So, if you're under 59½, expect to pay that penalty unless your plan specifically says otherwise.

Pros and Cons to Consider

Pros:

• Can help you buy a home sooner

• May give you access to a larger down payment, potentially lowering your mortgage rate

• With a loan, you repay yourself instead of a bank

Cons:

• Withdrawals can reduce your retirement nest egg significantly

• Loans must be repaid within a set time—or in full if you leave your job

• May pause your contributions and employer match during the loan term

• Risk of additional tax burden or penalties if not handled properly

Are There Better Alternatives?

Before dipping into your retirement, consider these options first:

• IRA First-Time Buyer Exemption: IRAs allow penalty-free withdrawals up to $10,000 for qualified first-time buyers (though taxes may still apply on traditional IRAs)

• Low Down Payment Loans: FHA, VA, USDA, and many conventional loans allow 3.5% to 5% down payments

• Down Payment Assistance: Local, state, and nonprofit programs may offer grants or forgivable loans

• Gifted Funds: Many loan programs accept down payment gifts from family

The Bottom Line

Using your 401(k) to buy a home might feel like a shortcut, but it could cost you more in the long run. For some buyers, especially those with few alternatives, it might make sense. But if you're in a position to explore other options, they may offer a safer financial path.

As a REALTOR® based in Norman and the greater OKC metro, I help first-time buyers make informed decisions that align with both their short-term goals and long-term financial health.

If you're unsure whether tapping into your 401(k) is the right move, let's have a conversation about it.

Let’s Talk About Your Best Options

Whether you're just starting your home search or actively planning a purchase, I’m here to help. Let’s take a look at your situation and explore smart, strategic ways to make your homeownership dream a reality.

Call or text Daniella Miller, Realtor at 405-413-9802 to schedule a consultation.