Some young, retired savers say they might raid their 401(k) accounts to buy a house. But experts warn that doing so may be at their expense.
Nearly one-third (30%) of aspiring homeowners say they plan to withdraw money from their 401(k) plan to finance the purchase, according to BMO Financial Group's Real Financial Progress Index. BMO surveyed 2,505 American adults this spring.
Millennials and Generation Z are more likely than older generations to say they will withdraw money from their 401(k), BMO found, at 31% and 34%, respectively. For comparison, only 25% of Gen
“You really, really, really shouldn't spend your retirement buying a house,” said Stacy Francis, a certified financial planner and president and CEO of Francis Financial in New York City.
More personal finance:
Doing so may cause borrowers to miss out on forgiveness
A 20% down payment on a house is not the “law of the land.”
Is it time to rethink the 4% retirement withdrawal rule?
In general, early withdrawal from retirement accounts can result in taxes and a 10% penalty, unless the account holder meets a listed exception. For both Individual Retirement Accounts and 401(k)s, eligible first-time homebuyers may be able to take up to $10,000 without penalty. With Roth IRAs, owners can withdraw their after-tax contributions at any time without penalty.
However, Francis, a member of the Council of Financial Advisors, told CNBC, “It's much better to have those dollars working for you.”
While a 401(k) loan may be a better option for meeting the payments needed to buy a home, doing so comes with its own set of financial risks, experts say.
“Significant financial consequences” of withdrawals
More savers tapped into their retirement savings last year, which experts say shows some families were facing financial distress. In 2023, 3.6% of savers made hard withdrawals, up from 2.8% in 2022, according to Vanguard's How America Saves 2024 Preview.
Making withdrawals from your 401(k) plan can have “significant financial consequences,” said Tom Parrish, head of lending at BMO. Not only will you put a dent in your retirement funds, early withdrawals can often expose you to penalty fees and associated taxes, he said.
“There's a reason there are limits on these accounts. They're in your best interest,” said Clifford Cornell, a certified financial planner and associate financial advisor at Bone Fide Wealth in New York.
For example, a 30-year-old worker who left $10,000 in a 401(k) instead of withdrawing it could end up with nearly $77,000 more for retirement at age 65, assuming average annual returns of 6%. .
Pros and Cons of 401(k) Loans
While experts say taking out a loan against your 401(k) is generally a bad idea, it can be a more palatable option for a down payment or portion of closing costs, versus a withdrawal.
Federal law allows workers to borrow up to 50% of their 401(k) account balance or $50,000, whichever is less, without penalty as long as the loan is repaid within five years.
“The key thing is to make sure you pay that amount within that time period,” Parrish said.
However, if you leave your company — whether you get laid off or find a new job — most employers will require that your outstanding balance be paid more quickly.
Another risk is that you're stretching your household budget. Buying a home entails real, long-term commitments, Francis said. Buyers are not only responsible for the down payment, moving and closing costs, but also must take ongoing mortgage payments, property taxes and maintenance costs into account.
“It would be very expensive for you to do that,” she said. If “any little domino falls in the wrong direction,” you may not be able to pay off your 401(k) or mortgage, putting yourself in a “real deep financial hole,” Francis said.
