Money Moves

Should You Use Your 401(k) or IRA for a Down Payment? Rules, Costs and Better Options

Your retirement account can help with a down payment through a 401(k) loan or the IRA first-home exception. Here's how each works and what it really costs.

By Shivam Kaushik · Updated November 12, 2026 · 4 min read

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Quick answers

401(k) loan: many plans let you borrow up to the lesser of $50,000 or 50% of your vested balance, and you pay yourself back with interest.
401(k) withdrawal: usually taxed as income, plus a 10% penalty if you’re under 59½.
IRA first-home exception: up to $10,000 (lifetime) can come out of an IRA without the 10% penalty for a first home. Traditional IRA money is still taxed.
The biggest hidden cost is lost growth: money taken out today isn’t compounding for retirement.

Saving a down payment is the hardest part of buying for many people. If most of your savings sit in a retirement account, it’s tempting to tap it. Sometimes that’s reasonable; often there’s a cheaper path. Here’s how each option works, according to IRS rules.

Option 1: Borrow from your 401(k)

If your plan allows loans, you can generally borrow up to $50,000 or half of your vested balance, whichever is less. You repay through payroll, with interest that goes back into your own account.

Pros: no taxes or penalty if you repay on time; no credit check.
Cons: the payment reduces your take-home pay; the borrowed money misses market growth; if you leave your job, the balance may come due quickly, often by your next tax filing deadline, or it’s treated as a taxable distribution.
Repayment term: general-purpose loans usually must be repaid within five years, but plans can allow longer terms for buying a primary home.

ExampleBorrowing $30,000 from a 401(k) at an example 8.5% over five years means payments of about $615 a month. Lenders may count that payment in your debt-to-income ratio, which could lower how much house you qualify for.

Option 2: Withdraw from your 401(k)

Some plans allow a hardship withdrawal for buying a principal residence. But it’s usually the most expensive route: the amount is taxed as ordinary income, and if you’re under 59½ you’ll typically owe an extra 10% penalty.

$30,000 withdrawal (example)	Amount
Federal income tax at a 22% bracket	−$6,600
10% early withdrawal penalty	−$3,000
What you actually get (before state tax)	~$20,400

Option 3: The IRA first-time homebuyer exception

You can take up to $10,000 over your lifetime from an IRA for a first home without the 10% penalty. “First-time” here generally means you (and your spouse, if married) didn’t own a main home in the past two years. With a traditional IRA, the withdrawal is still taxed as income. With a Roth IRA, your original contributions can come out tax- and penalty-free at any time, and the $10,000 exception can also cover earnings once the account has been open five years.

Myth buster“The $10,000 IRA rule works for 401(k)s too.” It doesn’t. The first-home exception applies to IRAs, not to 401(k) withdrawals.

The hidden cost: lost growth

Money pulled out today can’t grow for retirement. As a simple illustration, $30,000 that grew at 7% a year for 25 years would become about $162,800. Actual returns vary and are never guaranteed, but the trade-off is real.

Fun factYou don’t need 20% down for most loans. FHA allows 3.5% and some conventional programs allow 3%, so you may need far less from retirement savings than you think. See how PMI works.

Better options to try first

Down payment assistance: grants and low-cost second loans. See down payment assistance.
Gift funds from family: allowed on many loans with proper paperwork. See gift funds.
Smaller down payment: compare the cost of mortgage insurance with the cost of tapping retirement.
Seller credits for closing costs, which frees up your own cash.

Run the numbers

See how different down payments change your payment with the mortgage calculator and what you can afford with the affordability calculator. A tax professional can check the tax side for your situation.

FAQ

Can I use my 401(k) to buy a house without penalty?

Yes, by taking a 401(k) loan (if your plan allows) and repaying it on schedule. Withdrawals usually trigger tax and, under 59½, a 10% penalty.

How much can I borrow from my 401(k)?

Generally the lesser of $50,000 or 50% of your vested balance, if your plan offers loans.

What is the IRA first-time homebuyer exception?

It lets you withdraw up to $10,000 (lifetime) from an IRA for a first home without the 10% early withdrawal penalty.

Does a 401(k) loan affect my mortgage approval?

It can. Lenders may count the repayment as a monthly debt.

Sources: IRS (retirement plan loans; exceptions to tax on early distributions); CFPB; Keys & Coffee calculations. This article is general education, not tax or financial advice. Keys & Coffee is not a lender.

Written by

Shivam Kaushik· IMSHIVA

Founder & Director, QuibbleTech Solutions Pvt Ltd · Editor, Keys & Coffee

Shivam Kaushik is the founder of QuibbleTech Solutions Pvt Ltd and the editor of Keys & Coffee. He is not a licensed loan officer or financial adviser. Every guide here is written in plain English and checked against official sources such as the CFPB, HUD, Fannie Mae, Freddie Mac and the Federal Reserve. For advice on your own loan, talk to a licensed lender.

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Keys & Coffee is an independent education site. We are not a lender or mortgage broker, we do not take loan applications or payments, and nothing here is financial advice. This site is not affiliated with Axia Home Loans, Axia Financial, LLC, or Planet Home Lending. Rates and rules change often — always confirm details with a licensed loan officer and check any lender on the NMLS Consumer Access site.