Should You Use Your 401(k) Retirement Savings For Down Payment Assistance?

The surge of first-time homebuyers is growing at an incredible pace. Spurred by latent economic effects of our recent COVID climate, many have been drawn to the market by a perfect combo of cash stimulus and limited opportunities to spend.

While many restaurants, bars, and entertainment venues have been out of commission, home offices have become the norm, leaving many to rethink their budgets and living arrangements for the first time. But how do you afford a down payment in a market as heated as this one?

Down Payment Perks For First-Time Homebuyers

While first-time homebuyers will discover a range of benefits and breaks such as 3.5 percent down payment options and potential tax credits, they may also be faced with tough decisions like whether some of these programs are worth the incentive.

One of these first-time homebuyer programs that may give this new market something to mull over is using a 401(k) for down payment assistance. Currently, any first-time homebuyer may now withdraw up to $10,000 from their 401(k) without incurring the 10 percent penalty for early distribution.

What The Experts Are Saying

David Rosenhouse, a CPA for Dallas’s National Tax Consulting Group, weighs in on some of these implications.

“Obviously there’s no one-size-fits-all answer,” says Rosenhouse. “But generally, I worry about both sacrificing the potential growth of that retirement fund and there are also immediate tax implications despite dodging the 10 percent penalty.”

In laymen’s terms, the juice may not be worth the squeeze. Retirement accounts like 401(k)s are designed to appreciate at a rather steady pace. $10,000 today may be worth $50,000 in just a few years’ time. When you factor in that you would have to pay about $2,500 tax on the distribution, you’d be sacrificing a big payoff later for a quick $7,500 now.

“In most cases, I would recommend taking advantage of a first-time homebuyer option of a three point five or five percent down payment with PMI and keeping your money in the 401(k),” says Rosenhouse.

Do The Math on Your Down Payment

Again, there is no one size fits all answer to the question of using your 401(k) for down payment help. Factors like home price, income, and even retirement plans must be considered. Remember, our homes are some of the best investments we can make and it’s crucial to build those investments on solid foundations.