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Using Your 401(k) to Buy a House—Pros and Cons, Explained

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May. 12 2021, Published 3:02 p.m. ET

If you wonder whether you can use your 401(k) to buy a house, the important part is more whether you should instead of whether you can. It’s definitely possible to put those retirement savings toward a down payment on a house or on some other expense. People who took advantage of the CARES Act’s 401(k) provision in 2020 even got to take $100,000 from their savings without the early withdrawal penalty.

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But you should know that the money doesn’t “magically grow back,” in the words of certified financial planner Eric Roberge.

“It’s money you’ve removed that you’ve worked so hard to save,” Roberge, the founder of the wealth management firm Beyond Your Hammock, told CNBC last year. “By putting that money into real estate, it’s a coin flip on whether that’s going to be a good investment or not.”

You can use your 401(k) to buy a house—but it isn't recommended.

According to Rocket Mortgage, it isn't illegal to withdraw money from your 401(k) to buy a house or to pay for any other expense, but it’s also isn't advisable in many cases.

One of the biggest arguments against withdrawing 401(k) funds early is that you’ll likely be hit with a 10 percent early withdrawal penalty if you’re under the age of 59.5 years old—or 55 in the case of jobless individuals. Also, you’ll have to pay any applicable income tax on the 401(k) distribution.

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There are exemptions to the early withdrawal penalty. Spending the 401(k) money on home buying experiences for a principal residence could qualify you for these exemptions, according to Rocket Mortgage. However, the company warns that qualifying for those exemptions is difficult, especially because you’ll likely be disqualified if you have other assets that could go toward your home purchase.

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Either way, you’ll also have to contend with the loss in potential 401(k) growth. Investopedia said, “If you have $20,000 in your account and take out $10,000 for a home, that remaining $10,000 could potentially grow to $54,000 in 25 years with a 7-percent annualized return. But if you leave $20,000 in your 401(k) instead of using it for a home purchase, that $20,000 could grow to $108,000 in 25 years, earning the same 7-percent return.”

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You can also borrow from your 401(k), but there are downsides.

According to Quicken Loans, you can often borrow from your 401(k)—generally up to 50 percent of your vested account balance or $50,000, whichever amount is less—although the company advises checking with your employer or HR department to determine whether your 401(k) plan even allows loans. 

The company also notes that you’ll have an allotted time for repaying the loan, which is usually within five years. You’ll pay interest on the loan, which is often 2 points over the prime rate. The loan might impact your debt-to-income ratio and make it harder to get a mortgage.

However, there are upsides. Quicken Loans said, “Besides allowing you to make a purchase you might otherwise not be able to make, borrowing from your 401(k) is basically borrowing from yourself, rather than another lender. That means that you might not be losing as much money on interest payments as you would if you got the funds via another means.”

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