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Down Payment From a 401(k) or IRA: The Real Cost
Pulling from retirement to buy a home is one of the highest-stakes calls in personal finance. The IRS rules differ sharply by account type (Roth IRA, Traditional IRA, 401(k)), and the long-term opportunity cost rarely shows up in the headline number. This page walks through each option with the underlying IRS sections and Publications, then ties back into how mortgage lenders treat the funds when sizing your pre-approval.
Roth IRA: the first-time homebuyer exception
The Roth IRA is the only retirement account that doubles as a flexible down-payment source for first-time buyers without a penalty hit on the earnings portion, within strict limits. Two layers operate independently:
- Roth IRA contributions (your own after-tax dollars) can be withdrawn at any time, for any reason, with no tax and no penalty. This is true at any age and regardless of how long the account has been open. See IRS Publication 590-B, "Distributions From Roth IRAs - Are Distributions Taxable?".
- Roth IRA earnings can also be withdrawn penalty-free, up to a $10,000 lifetime cap, if you are a "first-time homebuyer" as defined in IRC § 72(t)(2)(F). "First-time" means you have not owned a principal residence in the prior two years. The account must also have been open at least five years to get the earnings tax-free; before 5 years, earnings are tax-free of the 10% early-withdrawal penalty but still taxable as ordinary income.
Worked example. Sarah, age 32, has $50,000 in her Roth IRA: $32,000 of contributions and $18,000 of earnings. The account was opened 7 years ago. She is a first-time homebuyer. She can withdraw the full $32,000 of contributions with no tax and no penalty (any time, any age). She can also withdraw an additional $10,000 of earnings, with no tax and no penalty, under the IRC § 72(t)(2)(F) exception. Total available for a down payment: $42,000. The remaining $8,000 of earnings stays in the Roth.
Source citations: 26 U.S.C. § 408A(d)(2) (ordering rule for Roth distributions); 26 U.S.C. § 72(t)(2)(F) (first-time homebuyer exception, $10,000 lifetime cap); IRS Publication 590-B, "Exceptions to the Tax". Full detail at our sibling site: Roth withdrawal rules guide and RothvsTraditionalIRA.com.
Traditional IRA: the same $10,000 exception, but it's still taxable
Traditional IRA withdrawals are subject to (1) ordinary income tax on the full amount because the contributions were pre-tax, and (2) a 10% early-withdrawal penalty if you are under 59½. The same first-time homebuyer exception in IRC § 72(t)(2)(F) waives the 10% penalty on up to $10,000 lifetime, but the ordinary-income tax still applies. Net out the tax and you get materially less than you would from a Roth.
Tax math. Withdraw $10,000 from a Traditional IRA at the 22% federal marginal bracket plus 5% state. Tax owed: $2,700. Net to down payment: $7,300. The 10% penalty is waived under the IRC § 72(t)(2)(F) exception (saves you the additional $1,000 penalty), but the ordinary-income tax is unavoidable. The same $10,000 from Roth contributions has zero tax cost.
Source citations: 26 U.S.C. § 408(d) (Traditional IRA distribution rules); 26 U.S.C. § 72(t) (10% early-withdrawal penalty); 26 U.S.C. § 72(t)(2)(F) (first-time homebuyer exception); IRS Publication 590-B Chapter 1.
401(k) loan: cheaper but riskier
Your 401(k) plan may allow a loan against your balance under IRC § 72(p). The loan is not a taxable distribution provided the loan terms meet the statutory requirements (repayment within 5 years for non-primary-residence loans, level amortisation, written agreement). Interest is paid back to your own account, not to the plan. The catch:
- Maximum loan: the lesser of $50,000 or 50% of the vested account balance (26 U.S.C. § 72(p)(2)(A)).
- Repayment term: 5 years for general loans, up to 15-30 years for primary-residence loans (plan-dependent; IRS allows it, your plan may not).
- Job-loss risk: if you leave the employer (voluntarily or not), the outstanding balance typically becomes due by the tax-filing deadline for the year of separation. SECURE Act of 2019 (Pub. L. 116-94) extended this from 60 days to the due date of the federal tax return, but it is still a forced payback or it becomes a deemed taxable distribution plus the 10% penalty if you are under 59½.
- Opportunity cost: the borrowed amount is out of the market for the loan term. A 5-year 401(k) loan during a 10% market year forgoes that compounding.
- Lender treatment: most underwriters add the 401(k) loan repayment to your DTI calculation. A $300/month repayment cuts about $48,000 off your maximum pre-approval at the back-end DTI ceiling.
Source citations: 26 U.S.C. § 72(p) (loans from qualified plans); 26 U.S.C. § 401(k); IRS Publication 575 "Pension and Annuity Income"; SECURE Act of 2019 § 113. Full 401(k) vs IRA detail at: 401kvsRothIRA.com.
401(k) hardship withdrawal: the worst option
A 401(k) hardship withdrawal under Treas. Reg. § 1.401(k)-1(d)(3) for "purchase of a principal residence" is permitted but expensive. Unlike the 401(k) loan, it is treated as a distribution: subject to ordinary income tax PLUS the 10% early-withdrawal penalty under IRC § 72(t) if you are under 59½. There is no first-time homebuyer exception for 401(k) hardship withdrawals (only the § 72(t)(2)(F) IRA exception applies; the 401(k) does not have a parallel rule).
Worked example. Withdraw $20,000 from a 401(k) at the 22% federal marginal bracket plus 5% state plus the 10% penalty. Total tax + penalty: $7,400. Net to down payment: $12,600. The same $20,000 from a 401(k) loan (paid back over 5 years) leaves you with the full $20,000 at the closing table, no tax owed, and the loan balance gradually replaced as you repay yourself.
Source citations: 26 U.S.C. § 401(k)(2)(B)(i)(IV); Treas. Reg. § 1.401(k)-1(d)(3) (hardship distribution rules); 26 U.S.C. § 72(t) (10% penalty applies); IRS Publication 575.
How lenders treat retirement-account down payments
The Fannie Mae Selling Guide (B3-4.3-03, "Retirement Accounts") and the Freddie Mac Single-Family Seller / Servicer Guide (§ 5501.3) treat retirement-account proceeds as eligible down-payment funds with documentation:
- For an outright distribution (Roth contribution withdrawal, IRA withdrawal): proof of the distribution and receipt of funds in your bank account, sourced and seasoned per standard asset documentation.
- For a 401(k) loan: copy of the loan agreement, terms, and monthly repayment. The repayment is added to your DTI.
- Vesting and access proof: lenders want to see that the funds you are pulling are actually withdrawable. Employer-restricted vesting on 401(k) contributions can disqualify the unvested portion.
FHA treats retirement-account funds similarly per FHA Handbook 4000.1 Section II.A.4.d ("Retirement Accounts"). VA per Pamphlet 26-7 Chapter 4 documents retirement account funds as part of asset verification.
The numbers that matter for your pre-approval
With current Freddie Mac PMMS at 6.36% on a 30-year fixed and the 2026 FHFA conforming limit at $832,750 (one-unit), the down-payment amount drives both the loan size (and therefore the monthly payment) and the question of whether you exceed the FHA floor at $541,287 or the conforming limit.
On a $400,000 home with 20% down ($80,000) at 6.36%, monthly P&I is roughly $1,994. The same home at 5% down ($20,000) carries about $2,371 monthly P&I plus PMI. A $30,000 incremental down payment from a Roth contribution withdrawal (no tax cost) reduces monthly P&I by about $186 and eliminates PMI roughly 5 years sooner.
But $30,000 out of a Roth at age 32, compounding at a 7% real return until age 65, would have been about $284,000 of tax-free retirement money. The choice is not about whether you can pull the funds; it is about whether the home you are buying is worth losing $254,000 of tax-free compounding. Run the math both ways.
Related cluster sites
RothvsTraditionalIRA.com
Full Roth vs Traditional decision guide. IRS Publication 590-A and 590-B citations throughout.
401kvsRothIRA.com
401(k) plan rules, loan provisions, contribution limits, and the SECURE 2.0 catch-up rule.
IncomeTaxByState.com
State property tax variance for the PITI side of the affordability picture.