LOS ANGELES (AP) — It can be tempting to raid retirement savings for a down payment on a home, especially if you’ve struggled to put enough money together to buy one. But should you?
Many 401(k) and similar retirement savings plans such as Individual Retirement Accounts (IRAs) allow home buyers to withdraw or borrow a limited portion of their nest egg to pay cash for the final purchase price, but large tax penalties and other short- and long-term financial impacts can be considered.
“Planning is the name of the game here,” said Stephen Cates, a financial analyst at the personal finance website Bankrate. “Running the numbers, having a solid understanding of what you can cover financially and managing the finances are going to be really important before you get into it.”
Years of inflation, high mortgage rates and skyrocketing home prices have become a major obstacle to home buying for many Americans. Meanwhile, the S&P 500 stock market index had only five low years between 2005 and 2025, which contributed to 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 66% gain over a 10-year period, according to the company. And the average IRA balance based on 18.9 million accounts was $137,095 at the end of December, a 51% gain since the last day of 2015.
Still, many savers may have ways to finance a home payment before their accounts grow enough. According to an analysis by Redfin, the average U.S. down payment on a home in December was $64,000.
Compare that with the average balance as of Dec. 31 for 401(k) plans and IRAs: $34,400 and $10,476, respectively, Fidelity said. (The median figure is lower than the average because workers who recently joined a retirement savings plan have not had time to build up a balance.)
Last year, it took the typical U.S. family seven years to save for a down payment on a home, down from a 12-year high in 2022, but still doubling the time it took before the coronavirus pandemic, according to an analysis by Realtor.com.
According to the National Association of Realtors, between July 2024 and June 2025, about 46% of all homeowners relied on savings to finance their down payment. This includes 59% of first-time buyers. Others received financial assistance from friends or relatives, or used money from an inheritance, cash from selling stocks or bonds.
However, raiding one’s retirement savings was not a popular choice. All told, 6% of all home buyers 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.
People who choose to use some of their retirement savings to buy a home should consider how it will affect their finances when they retire.
“Most likely, someone who’s taking money out of a 401(k), they’re going to have to retire after they have it, especially if they’re taking out a large portion of their balance,” Cates said.
Most 401(k) plans allow participants to borrow for the purchase of a primary residence, but there may be different requirements, for example, how long the borrower must repay.
The IRS also has rules governing 401(k) plans. The agency limits loans to 50% of the borrower’s linked account balance or $50,000, whichever is less.
Those with less than $10,000 in savings in their plan can borrow the full amount, if their plan sponsor allows it.
Weigh business deals against your retirement savings before taking out a loan.
The funds you borrow must be paid back, so you must budget for those payments, in addition to the costs that come with owning a home: mortgage payments, homeowners insurance, taxes, and so on.
However, the biggest risk with a 401(k) loan is that you lose your job before paying it off.
In such a scenario, the unpaid balance becomes a distribution that the borrower must report as taxable income. It is also subject to an additional tax of 10%, unless the borrower is at least 59 years and six months.
And, if that wasn’t painful enough, your retirement savings take a hit because the loan isn’t being repaid.
The IRS allows 401(k) savers to make what are known as hardship withdrawals to help them with special financial needs such as medical or funeral expenses, tuition and the purchase of a principal residence.
It’s not a loan, so you don’t have to pay it back, but it costs your retirement savings. And if you’re more than six months away from age 60, you’ll face a 10% tax penalty on the funds, which are taxable as ordinary income.
“The best of the two options available — either a loan or a foreclosure — a loan is the better option, because you can borrow from yourself, and you’ll pay yourself back with interest,” Cates said.
IRAs work differently than 401(k) plans. They don’t allow loans but allow savers to withdraw up to $10,000 without a 10% tax penalty, even if they’re under 59 and a half, as long as the funds are going toward a home purchase and the saver is a first-time home buyer.
As with 401(k) withdrawals, one must weigh the benefits of accessing the funds against the impact it will have on how long they will live in retirement.
Regardless of the type of retirement plan, homebuyers should consult with a financial planner and their retirement plan sponsor before making any decisions.
