Using Retirement Funds for a Down Payment on a House? What to Know

Housing has become remarkably expensive, leading some homebuyers to dip into their retirement nest eggs for their initial down payment. Recent reports state that nearly one in 10 homebuyers used post-career funds to buy a home.

It may seem harmless to take money from one investment for another, but there are several factors to consider.

Here’s what you need to know about where homebuyers currently stand, what to consider when using retirement funds for a down payment, and other potential alternatives for a down payment.

The current circumstances of purchasing a home

Let’s break down what the average American is paying, and what it takes to afford the average home today.

The average sales price of new houses sold in October 2025 was $498,000, according to U.S. Census Bureau data. In Q3, the average percentage of the purchase price paid as a down payment was 14.4%, putting the average down payment at approximately $72,000. This amount is being sourced from the following places, according to 2025 Bankrate survey data:

• 44% said they used personal savings
• 17% said they used a first-time homebuyer grant or loan assistance program
• 15% said they received a gift from friends or family
• 10% said they found an additional source of income
• 8% said they took money out of retirement savings
• 6% said they sold items

However, a 15% down payment with a 6% interest rate on a 30-year fixed mortgage leaves homeowners with a monthly payment of $2,538 – not including taxes or home insurance. These two additional costs could easily put this past $3,000 per month.

These factors coming together mean one thing: homebuyers now need a six-figure income to comfortably afford a home, according to Bankrate. It’s estimated that only 20% of people make this much. To bring down the monthly payment, buyers are dipping into their retirement accounts to get in the door.

The main ways retirement funds are used for down payments

Here are the different ways you can utilize your retirement funds for a home down payment.

1. 401(k) Loans

Many employer-sponsored plans allow participants to borrow against their 401(k). Typically, you can loan yourself up to 50% of your vested balance, capped at $50,000. The loan must usually be repaid within five years, with interest that goes back into your own account. This can sound appealing since there’s no outward cost.
The hidden risk is job stability. If you leave or lose your job, most plans require the remaining balance to be repaid quickly. If you can’t, the unpaid amount is treated as a distribution. This triggers income taxes and, if you’re under 59½ years old, a 10% penalty.

2. 401(k) Hardship Withdrawals

Hardship withdrawals permanently remove money from your retirement account. While buying a primary residence may qualify as a hardship, the IRS does not waive taxes or penalties. Withdrawn funds are taxed as ordinary income, and most people under 59½ will also owe a 10% early-withdrawal penalty.

Unlike a loan, this money can’t be repaid later. You also lose the potential investment growth. It’s one of the costliest ways to fund a down payment, even if it feels like the easiest in the moment.

3. IRA Withdrawals for First-Time Buyers

IRAs offer a slightly more flexible option. First-time homebuyers can withdraw up to $10,000 over their lifetime without paying the 10% early-withdrawal penalty. However, traditional IRA withdrawals are still subject to ordinary income tax.

Tools to help estimate the full cost of homeownership

Buying a home isn’t just about the purchase price or the down payment. Ongoing housing costs, existing debt, and repayment timelines all affect how affordable a home really is—both now and years down the road. To help readers run the numbers and understand how different choices can impact their finances, the following calculators break down common home-related costs and debt scenarios in plain terms.

• Home Equity Loan Calculator
• HELOC Payment Calculator
• Mortgage Payoff Calculator
• Early Loan Payoff Calculator
• Debt Consolidation Calculator
• Debt Snowball Calculator

The real costs beyond the down payment

Retirement funds are typically invested in the stock market, which has the potential to grow over time. However, when you pull that money out, you forfeit potential compound interest, which can be a significant opportunity cost to purchase a home.

Here are a few examples, with the assumption of a 7% yearly return:

1. Sally, the average saver

Sally is the average first-time homebuyer: now 40 years old. She has an averageretirement balance of roughly $109,000, according to Fidelity data. If she plans to work until she is 65 and contributes $10,000 per year to her retirement, she could retire with over $1.2 million in pre-tax dollars.

However, if she takes $50,000 out for a down payment and continues putting away $10,000 per year, she will only have $996,000. This means withdrawing $50,000 cost her over $200,000 in her retirement.

2. Joe, the hasty homebuyer

Joe is 30 years old and has $25,000 saved for retirement in his Roth IRA. He is getting married and needs money for a down payment on a home. He decides to withdraw his entire account balance.

If he didn’t touch that money until he was 59.5, it would have grown to over $190,000.

3. Teresa, an investor with terrible timing

Teresa is adamant about buying a home, so she decided to take the maximum loan from her 401(k). She is 45, with a 401(k) balance of $175,000. She is taking a maximum loan of $50,000.

A year later, she was unexpectedly laid off from her position, and had to quickly find a way to pay back the loan. She had to withdraw money from her 401(k) to pay back the loan, incurring income taxes and a 10% penalty.

At 46, she now has $125,000 in her 401(k). If she had not dipped into her 401(k), her $175,000 balance would have grown to $677,000 at age 65, without any further contributions. Now, one year later, her $125,000 will only grow to $452,000.

Situations where it might make sense

There are a few narrow cases where using retirement funds for a down payment can be defensible—if handled carefully.

1. Short-term gap with strong income stability

If the issue is timing rather than affordability, and you have reliable, high income with clear near-term cash coming in (bonuses, vesting, liquidity events), retirement funds may serve as a temporary bridge—not a crutch.

2. Limited use, not draining accounts

Tapping a small amount to supplement a down payment is fundamentally different from emptying retirement accounts to make a purchase work. If you need most of your retirement savings just to buy the home, it may be advantageous to rent for a few more years to keep saving.

3. Roth IRA contributions, not earnings

If retirement money must be used, Roth IRA contributions are the least damaging option. They can be withdrawn tax- and penalty-free. But once you withdraw those funds, you permanently give up years of potential tax-free growth.

Alternatives worth considering

Once you get the idea of homeownership, it can be difficult to turn back towards renting – especially when it’s only a factor of money standing in the way. There are alternatives worth considering to either help you get into your dream home, or prepare you for buying a home in the future.

1. Down payment assistance programs

State and local programs may offer grants, forgivable loans, or low-interest second mortgages, aimed at first-time buyers or moderate-income households.

2. Low down payment mortgage options

Conventional loans can require as little as 3% down, while FHA and VA loans offer even lower barriers. You may pay more in monthly costs, but you preserve long-term retirement growth.

3. Waiting and investing instead

Delaying a purchase while investing your down payment can improve flexibility, strengthen your balance sheet, and reduce the risk of becoming house-poor. Time is often the cheapest financing available.

Sometimes the smartest move isn’t finding more money, it’s choosing a better path.

Final Thoughts

Homeownership can be a great part of your journey towards financial freedom. However, investing can potentially net larger gains, according to Investopedia.

Before you hastily pull money out of your retirement fund, be sure to run the numbers on what you may be potentially losing out on (and potential penalties).