Before You Use Your 401(k) to Buy a Home, Ask These Two Questions

Both retirement savings and homeownership can support long-term financial independence, but only when the right questions are addressed first. Timing, balance, and execution—not impulse—ultimately shape the outcome.

By Rich Arzaga, CFP®, CCIM, The Real Estate Whisperer®

President Trump has floated the idea of allowing 401(k) savers to use a portion of their retirement contributions toward a down payment on a home. While the details are still emerging, the proposal raises an important planning question:

Should a prospective homebuyer tap retirement savings to buy a home?

The short answer: sometimes—but only for a narrow set of buyers and only with thoughtful guardrails.

Borrowing from a retirement account—even if done penalty-free and tax-deferred—is not universally “good” policy. It becomes harmful when treated as a default strategy rather than a deliberate, well-reasoned choice. The real risk is not the rule itself, but the possibility that it encourages impulsive decisions rather than disciplined planning.

The real risk is not the rule itself, but the possibility that it encourages impulse decisions instead of disciplined planning.

Start With Objectives—Not Policy Headlines

Most commentary jumps straight to whether the proposal is “good” or “bad.” A better approach is to begin with objectives. Before judging the policy, a buyer should answer two qualifying questions.

1. Does the buyer actually need retirement funds to purchase the home?

If the answer is no—and the buyer has sufficient cash outside retirement accounts—then using a 401(k) is generally inferior in practice. From both a long-term return and tax-advantaged compounding perspective, keeping retirement assets invested usually wins.

If the answer is yes—the buyer cannot purchase a home without accessing retirement assets—then this use aligns more closely with the policy’s intended purpose. That leads to the second, more difficult question.

What Is the Buyer’s Core Objective?

This is where planning becomes uncomfortable, especially when the promise of the American Dream—emphasis on dream—feels just one account transfer away.

If the primary objective is to maximize long-term wealth, history offers a useful perspective. Since 1926, long-term average returns have looked roughly like this:

• Home appreciation: ~4%

• Inflation: ~3%

• Stocks: ~8–9%

• Balanced portfolios: ~6–7%

  
  

These figures don’t even include key advantages of retirement accounts: tax-deferred growth, diversified asset allocation (to avoid a concentration of capital in a single property), and future planning flexibility, such as Roth conversions.

Housing does offer benefits—most notably positive leverage (gaining appreciation on 100% of a home’s value while putting down only a fraction) and potential tax deductions for mortgage interest and property taxes. But the math is different for everyone, and over long horizons, retirement assets typically outperform housing equity on a pure return basis.

For many households, pulling money from a 401(k) reduces expected lifetime wealth—unless homeownership meaningfully changes behavior through forced savings, stability, or reduced overall risk.

Pulling money from a 401(k) reduces expected lifetime wealth—unless homeownership meaningfully changes behavior through forced savings, stability, or reduced overall risk.

A Competing (and Valid) Objective: Making Homeownership Possible

There is, however, another important objective: achieving homeownership when it would otherwise be impossible.

This is not just emotional—it’s practical. Renting indefinitely carries real risks: housing inflation, residential instability, and no participation in home equity growth. For younger households or those with limited resources, the option value of buying matters.

In these cases, limited access to 401(k) funds can be a rational decision.

This Doesn’t Have to Be All-or-Nothing

One of the most overlooked planning opportunities is moderation.

Does someone considering this need to maximize their 401(k) withdrawals? Of course not. Partial solutions often strike the best balance.

For example, if a buyer needs a $50,000 down payment but has $40,000 in savings, using only $10,000 from a 401(k) can:

• Enable the home purchase

• Preserve most retirement compounding

• Limit long-term opportunity cost

• Reduce behavioral and financial risk

Thoughtful sizing matters.

This isn’t about choosing a rule—it’s about making a decision you won’t regret later.

Final Thoughts and Open Questions

It’s still unclear whether this proposal would apply only to first-time homebuyers or to a broader group. If expanded beyond first-time buyers, the implications could ripple across multiple stages of homeownership.

It’s also worth remembering that retirement-based home financing is not new. Long-standing rules already allow many first-time buyers to borrow from retirement accounts—though these options receive little attention today. Typically, this includes borrowing up to the lesser of 50% of a vested 401(k) balance or $50,000, and up to $10,000 from an IRA without tax or penalty under certain conditions.

As always, buyers should confirm specifics with their plan administrator and a qualified tax professional.

The takeaway: Using retirement funds for a home purchase can be appropriate—but only when guided by clear objectives, disciplined limits, and an understanding of the long-term tradeoffs.

Written by Rich Arzaga, CFP®, CCIM, Founder, The Real Estate Whisperer® Financial Planning. Helping clients and advisors integrate real estate into holistic financial plans.

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