Can You Use Retirement Savings for a Down Payment? IRA and 401(k) Rules Explained

If your retirement account holds more than your savings account, it's natural to wonder whether you can use it to buy a home. The answer is often yes, but how you do it matters a great deal. Some options carry taxes and penalties, some create loan obligations, and all of them reduce the money growing for your retirement.

This guide explains the main options under IRS rules and how to think about the trade-offs.

Option 1: The IRA first-time homebuyer exception

Withdrawals from a traditional IRA before age 59½ usually trigger ordinary income tax plus a 10% additional tax. One exception: you can withdraw up to $10,000 over your lifetime for a first-time home purchase without the 10% additional tax. The IRS covers this in Topic 557 and Publication 590-B.

Key details:

• "First-time homebuyer" is defined broadly: generally, you (and your spouse, if married) haven't owned a main home in the two years before the purchase.
• The money can help buy a home for you, your spouse, your children, grandchildren, or parents and other ancestors who meet the definition.
• You must use the money within 120 days for qualified acquisition costs.
• It's a lifetime limit of $10,000 per person. Each spouse can use their own IRA, so a couple may be able to withdraw up to $20,000 combined.
• Income tax still applies to traditional IRA withdrawals. Only the 10% additional tax is waived.

Option 2: Roth IRA contributions (and possibly earnings)

Roth IRAs work differently. Your contributions (not earnings) can generally be withdrawn at any time without tax or penalty, because you already paid tax on that money. Roth earnings may also come out tax-free and penalty-free for a first-time home purchase, up to the $10,000 lifetime limit, if the account has met the five-year holding requirement. Earnings withdrawn before then may be taxable even if the 10% additional tax doesn't apply. Publication 590-B has the ordering rules and details.

This makes Roth contributions one of the more flexible sources, though every dollar withdrawn stops growing tax-free for retirement, and you can't put it back except within normal annual contribution limits.

Option 3: A 401(k) loan

Many employer plans allow you to borrow from your 401(k). Under IRS rules, the maximum is generally the lesser of $50,000 or 50% of your vested balance. Loans usually must be repaid within five years, but plans can allow a longer term for a loan used to buy your main home. You pay interest back into your own account.

Pros: no taxes or penalties if you repay on schedule, and you're paying interest to yourself.

Cons:

• Repayments reduce your take-home pay, and lenders may count the repayment in your debt-to-income ratio, depending on the program. See our DTI guide.
• If you leave your job, the outstanding balance may be due sooner. Unpaid balances can be treated as a distribution, triggering tax and possibly the 10% additional tax.
• Lost growth: the borrowed money isn't invested while it's out of the account.

Not every plan offers loans; check your plan documents.

Option 4: A 401(k) hardship withdrawal

Some plans allow hardship withdrawals for costs directly related to buying a principal residence. The IRS explains the rules on its hardship distributions page. Hardship withdrawals are generally taxable, may be subject to the 10% additional tax, and can't be repaid to the plan. The $10,000 first-time homebuyer exception applies to IRAs, not 401(k)s. This is usually the costliest route.

The real cost: lost growth

The biggest cost of tapping retirement money is often invisible: what that money would have grown to. Investor.gov's compound interest calculator can help you estimate it. As a hypothetical illustration, $10,000 growing at 6% a year for 30 years becomes about $57,435. That's a hypothetical return, not a forecast, but it shows why many advisers treat retirement accounts as a last resort for a down payment.

Comparing it with borrowing more

On the other side of the ledger, using $10,000 of retirement money reduces your mortgage by $10,000. At this week's 30-year average of 7.32% (October 22, 2026), that lowers your monthly principal and interest by about $69 and saves roughly $14,730 in interest if you kept the loan for 30 years. It might also help you reach a down payment threshold that eliminates or reduces mortgage insurance. See our PMI guide.

A sensible order of operations

1. Max out regular savings first, including windfalls; see our savings habits guide.
2. Check down payment assistance programs in your state; your state page links to your housing finance agency.
3. Consider low-down-payment loans before raiding retirement. See how much down payment you really need.
4. If you still need more, Roth contributions are generally the least costly retirement source.
5. Next, the IRA first-time homebuyer exception, understanding the income tax you'll owe on traditional IRA money.
6. A 401(k) loan if your job is stable and the repayment fits your budget.
7. Avoid hardship withdrawals unless there's no better option.

Talk with a tax professional before withdrawing; the rules have details that matter for your situation.

Rules change; a current guide helps

IRA and 401(k) withdrawal rules are detailed, and exceptions have dollar limits that Congress can change. Keep official IRS and plan-document sources first; a recent IRA and retirement guide book is a useful secondary reference while you decide whether to tap the account.

IRA and retirement guide books on Amazon (Affiliate link. We may earn a commission.)

Practical takeaways

• The IRA first-time homebuyer exception waives the 10% additional tax on up to $10,000, but not income tax on traditional IRA money.
• Roth contributions can generally be withdrawn anytime without tax or penalty.
• 401(k) loans avoid taxes if repaid but carry job-change risk and can affect your DTI.
• The hidden cost of any withdrawal is lost long-term growth.
• Model the trade-off in our calculators and track all your accounts in the tracker.

Sources

• IRS Topic 557: Additional tax on early distributions
• IRS Publication 590-B: Distributions from IRAs
• IRS: Hardship distributions
• Investor.gov: Compound interest calculator
• Freddie Mac Primary Mortgage Market Survey

Tax rules change and have exceptions; confirm with the IRS or a tax professional. Rates are as of the dates noted. This article is for education only and is not financial or tax advice.