September 18, 2025
by
Landy Liu
For many first-time buyers facing rising home prices and stiff competition, coming up with a down payment feels harder than ever. So it’s no surprise that a growing number of hopeful homeowners are looking to their retirement savings, specifically, their 401(k), as a potential source of funds. But is tapping into your future financial security a smart move today?
Let’s break down everything you need to know about using a 401(k) to buy a home: the rules, the risks, and the better alternatives.
Before we answer whether you should, let’s address whether you even can use a 401k to buy a home.
Yes, but how you access your 401(k) makes all the difference. There are two main options: a withdrawal or a loan. A withdrawal permanently removes funds from your account, which may trigger taxes and penalties. A loan, on the other hand, lets you borrow from your balance and repay it over time with interest.
401(k) plans are subject to IRS regulations, and not every employer plan allows both methods. Unlike IRAs, 401(k)s don’t have a specific exception for first-time homebuyers when it comes to early withdrawal penalties.
If you take a 401(k) withdrawal before age 59½, it usually comes with a 10% early withdrawal penalty, in addition to income tax on the full amount. For example, withdrawing $30,000 could result in a combined loss of nearly $10,000 in taxes and penalties, depending on your tax bracket. That’s a steep cost for short-term liquidity.
Not when it comes to 401(k)s. While IRAs allow a one-time, penalty-free withdrawal of up to $10,000 for first-time homebuyers, 401(k)s offer no such carveout. Some plans allow hardship withdrawals for buying a primary residence, but these are still subject to taxes and, often, penalties.
Perhaps the biggest concern isn’t the tax hit, it’s what you lose in long-term growth. A $30,000 withdrawal today could have grown to more than $100,000 by the time you retire. Using retirement funds early can delay your ability to reach future financial goals and reduce your financial security later in life.
A 401(k) loan lets you borrow up to 50% of your vested account balance, up to a $50,000 maximum. You repay the loan through payroll deductions, usually within five years, although some plans extend this term for home purchases. Interest rates are generally low, and the interest you pay goes back into your account.
The main risk is job loss. If you leave your employer, whether by choice or not, the remaining loan balance may become due quickly, often within 60 days. If you can’t repay it, the balance is treated as a distribution, triggering taxes and potential penalties. Additionally, you repay the loan with after-tax dollars, which means the money gets taxed again when you withdraw it in retirement.
A loan may offer more flexibility than a withdrawal. There’s no early withdrawal penalty or immediate income tax, and credit checks aren’t required. Because you're borrowing from yourself, the interest payments stay within your account, not a bank’s.
Setting aside money in a dedicated savings or high-yield account keeps your retirement savings intact and offers more flexibility. These accounts are better suited for short- to mid-term goals, like buying a home.
Using your 401(k) to buy a home isn’t ideal, but for some, it can be a calculated decision. If you’re nearing retirement and the long-term impact on your savings is minimal, or if it’s the only way to avoid private mortgage insurance, it may be worth considering. A 401(k) loan may also make sense if you’re confident in your job stability and ability to repay quickly.
If you’re in your 20s or 30s, borrowing from your 401(k) can significantly reduce future growth, time you won’t easily recover. It's also worth exploring other options, such as rewards-based savings platforms, before pulling from your retirement. And if your income or employment is uncertain, the risks of default and penalties increase.
Most financial advisors view 401(k) withdrawals as a last resort. Loans are generally preferred over permanent withdrawals, but both come with tradeoffs. If you're seriously considering it, consult a financial professional to assess the risks and understand the impact on your long-term goals.
Can I withdraw from my 401k to buy a house without penalty?
Not typically. Withdrawals before age 59½ usually come with a 10% penalty and income taxes. 401(k)s don’t offer a penalty-free exception for first-time homebuyers. A loan may be a better option if your plan allows it and you're able to repay on time.
How can I avoid the 10% penalty on 401k withdrawal?
Taking a loan instead of a withdrawal can help you avoid the penalty, as long as you stick to the repayment schedule. Penalty-free withdrawals are only allowed under specific hardship conditions or after age 59½.
Is buying a home considered a hardship withdrawal?
Yes, it can be, if your 401(k) plan permits it. The IRS allows hardship withdrawals for buying a primary residence, but taxes and penalties usually still apply.
Using your 401(k) to buy a home is possible, but rarely optimal. For most first-time buyers, it’s worth exploring other solutions that preserve long-term savings.
Using your 401(k) might feel like the only way to close the gap on a down payment—but it doesn't have to be. Foyer was designed to support first-time buyers with a savings program that doesn’t sacrifice your financial future to fund your first home.
When you open a Foyer Savings Account, you don’t just earn interest—you earn rewards. For every dollar you save, Foyer contributes a little extra through our savings match program. That means the more progress you make, the more we chip in to help you cross the finish line faster.
Here’s what makes it different:
With Foyer, you don’t have to choose between saving for retirement and saving for a home. We help you do both—smarter.
Ready to build toward homeownership without draining your 401(k)?
Start saving with Foyer today.
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Foyer is a fintech company, not an FDIC-insured bank. Banking services provided by Pacific West Bank, Member FDIC. Deposit insurance covers the failure of an insured bank.
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