Purchasing a home is a major milestone, and one of the greatest obstacles to achieving this financial goal is saving up for the down payment. If you’re struggling to save enough to buy a home, you might wonder if you can tap into your 401(k) or other retirement savings accounts to bridge the gap. 

Choosing to withdraw from your retirement account often comes with taxes and fees. However, in some cases, first-time homebuyers may be able to make an early withdrawal without paying the penalty. 

Using Your 401(k) to Buy a Home

A 401(k) plan is a popular tool that uses tax advantages to help you save for retirement. With a traditional 401(k), you’re able to deduct your contributions from your taxable income to lower your tax bill for the year. You pay taxes when you make withdrawals in retirement.

Early access to your 401(k) funds is limited. Take money out early, you incur a 10% early withdrawal penalty. Additionally, account-holders will owe income tax on the amount distributed.  

The earliest you can withdraw from a 401(k) without facing penalties is age 59 1⁄2, or 55, if you are no longer employed.

A 401(k) loan is another option if you’re looking to avoid the early withdrawal penalty. You’ll need to repay the loan and interest within a specified timeframe, and you may be subject to a maximum withdrawal amount determined by your plan provider. 

IRAs Offer Special Provisions for First-Time Homebuyers

Individual retirement accounts (IRAs) offer special provisions for first-time homebuyers and people who haven’t owned a primary residence in the last two years.

Those under 59 ½ may withdraw up to $10,000 from a traditional IRA and avoid the 10% penalty if the money is used for a first-time home purchase.

If you withdraw more than $10,000 from a traditional IRA, the 10% penalty would be applied to the additional amount and added to your income taxes.

When it comes to a Roth IRA, you can withdraw as much as you like with no penalties or taxes, as the funds have already been taxed. 

However, if you want to withdraw funds early from your Roth IRA, you must have had the account for five years and you must pay taxes on any earnings withdrawn. 

Closing Thoughts

When using your 401(k) or IRA to purchase a property, you may incur a penalty or have to pay income tax on the amount you withdraw, which is an upfront cost you’ll need to prepare for. You’ll also need to account for the lost gains from a lower retirement account balance.

Alternatives to using your retirement funds for a home purchase include saving for longer, or more aggressively, exploring down payment assistance programs, negotiating with sellers, or considering alternative housing options. 

Ultimately, the decision depends on individual financial circumstances and goals. It’s always best to consult with a trusted professional to determine the best course of action for you and your family.