I am 60 years old and want to build a new house for $700,000. We have $1.5 million in 401(k) plans, including $500,000 in Roth funds, which I could withdraw to pay a big chunk of the house. We have a pension of $70,000 a year and Social Security of $44,000 per year. Also, the sale of a property with a payment of $36,000 per year. Would you pull the money from the Roth or borrow the whole thing and use 401(k) withdrawals to pay the mortgage? We won’t collect the pension or Social Security for two more years.
– Brian
When you’re in a strong financial position and planning for a major life event like building a new home, it’s natural to consider all available resources. But as you approach retirement, the way you fund large expenses can have long-lasting implications for your financial security. No single funding method is likely to meet all your needs and goals. Once you’ve explored the available options, the trade-offs of each become clearer—and why we typically recommend avoiding the use of retirement savings for non-retirement needs, unless it’s a true emergency.
A financial advisor can help you make major financial decisions, like how to pay for a new home. Connect with a fiduciary advisor today.
Option 1: Lump Sum Withdrawal from Retirement Accounts
On the surface, using a lump sum from a 401(k) to pay for construction might seem like the simplest option, but it comes with several drawbacks.
First, there could be a meaningful tax impact, as withdrawing from a traditional 401(k) triggers ordinary income tax. A $700,000 withdrawal could push you into the top tax brackets and trigger a significant tax bill.
Second, even withdrawing the $500,000 in Roth assets—which wouldn’t add to your tax bill—comes at a steep opportunity cost. Roth accounts grow tax-free and offer flexibility for managing taxable income in retirement. Depleting those assets early robs you of a highly flexible income source later.
Third, keep in mind the timing of withdrawals. While we always encourage investors to avoid trying to time the market, it’s worth paying close attention to the timing of large withdrawals. Specifically, if you’re withdrawing funds during a down market (as may be the case today), you could risk locking in losses to fund a non-essential purchase—a strategy we would advise against unless it’s an emergency.
Ultimately, retirement savings should be preserved to fund retirement itself, especially if you don’t yet know whether your pension and Social Security will fully cover your expenses. (And if you have similar questions related to retirement or financial planning, speak with a financial advisor.)
Option 2: Get a Mortgage and Use 401(k) to Pay it
Another possibility is to finance the construction and make monthly mortgage payments using annual 401(k) withdrawals.
Assuming a $700,000 loan, payments could easily total $60,000 per year. That implies an annual 4% withdrawal rate from your retirement portfolio—even before considering other living expenses. The 4% rule offers a general benchmark for sustainable withdrawals, but it oversimplifies a highly personalized decision.
The long-term sustainability and longevity of your retirement savings is the key consideration with this approach. If your annual living expenses exceed your anticipated pension and Social Security income ($114,000 per year starting in two years), then you’ll need additional withdrawals to fill the gap. An estimated $60,000 mortgage on top of these other living expenses could stretch that balance quickly.
Additionally, consider how this strategy might impact the flexibility of your assets. If you ever need to rely on your 401(k) as a primary funding source in the event of an emergency, then your mortgage payment plan might be at risk. Furthermore, additional withdrawals could result in higher taxes and deplete the account more rapidly. You may face these costs from multiple sources, but don’t forget those related to homeownership, such as property taxes, maintenance and insurance.
This option provides some tax flexibility if withdrawals are smaller and spread over many years, instead of a large lump sum that could propel you into a higher tax bracket. However, it still jeopardizes the core purpose of your retirement funds.
(Speak with a financial advisor if you’re unsure how to structure retirement withdrawals in a way that makes the most sense for you.)
Alternative Options
A third option would be to use any other liquid assets, such as cash in a checking or savings account or investments in a taxable brokerage account, to fund a down payment and then take out a mortgage for the remaining construction costs.
If you have sufficient cash in a checking or savings account to make a meaningful down payment, this could be more tax efficient than either liquidating 401(k) savings and triggering income taxes. It could also be more practical than selling assets in a taxable brokerage account and paying capital gains taxes. In addition to preserving your 401(k) for future retirement needs, this approach could be more balanced than the two previous options by allowing you to take out a smaller mortgage, resulting in more manageable monthly payments in retirement.
Selling your current home and renting while you build your new home is a fourth option to consider. If you do not plan to keep your current home, selling it now would free up equity, potentially lower your monthly housing expense during construction and generate cash to fund a portion of the new build. Renting may not be ideal, but it could offer short-term flexibility depending on your location and rental rates. (And if you need help finding financial advice, this free tool can match you with fiduciary advisors who serve your area.)
What Else to Consider
While thinking through the above options—and perhaps several others—there are some important, but non-exhaustive, questions you should keep in mind. These questions can help confirm whether your strategy aligns with your financial goals and existing long-term plan. (A financial advisor can help you explore these questions and estimate their impact on your financial plan.)
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Income sources: Are you still working? If not, then withdrawals before age 62 may need to fill the gap until pension payments and Social Security distributions start.
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Liquid assets: Do you have sufficient cash reserves or brokerage assets to draw from without dipping into retirement accounts to fund the home build?
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Living expenses: If your annual retirement expenses exceed your $114,000 in combined pension income and Social Security benefits, you’ll need to preserve your retirement savings to bridge the gap. That’s one reason large early withdrawals can pose a risk.
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Current home strategy: Will you keep or sell it? If keeping, do you plan to rent it out, or will it sit vacant during construction and essentially be kept as a long-term investment asset? Renting it out would offset all or at least some of the expenses associated with keeping it. Adding a second mortgage or taking a lump sum withdrawal from your 401(k) in the absence of liquid savings could be difficult and compromise the sustainability of your retirement savings.
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Withdrawal rate: A $60,000 annual mortgage represents a 4% withdrawal rate, not including other expenses. If your actual rate is 5% or more, that raises concerns about the long-term viability of your retirement assets, especially if you’re in good health and expect to enjoy a lengthy retirement.
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Emergency preparedness: Without significant non-retirement savings, you’d be forced to dip further into your 401(k) in a crisis—this often represents a slippery slope to rapid asset depletion.
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Estate planning goals: If leaving a legacy or inheritance is a priority, preserving your Roth account and 401(k) balances will help ensure you’re able to pass on tax-advantaged assets to heirs.
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Healthcare and long-term care: Do you have long-term care insurance? What’s your family health history and outlook? Large, unexpected expenses could arise and require liquid assets or insurance to cover them. Do not overlook the importance of preparing for medical expenses and long-term care.
Bottom Line
There’s no one-size-fits-all answer, but we believe retirement accounts are meant to fund your retirement and should only be tapped in a true emergency. The large retirement nest egg you have worked incredibly hard to build might seem like the expedient option for funding the construction of a new home, but we encourage you to remain committed to using these assets for their intended purpose—supporting a long and well-deserved retirement.
This is especially important to keep in mind when more traditional alternatives exist, like using cash savings or equity from your existing home on top of a responsibly sized mortgage to fund construction. Regardless of the path you choose, taking a thoughtful, measured approach will help you enjoy your new home without jeopardizing your financial security in the years ahead.
Retirement Planning Tips
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Develop a withdrawal strategy that considers tax treatment across different account types—tax-deferred (like traditional IRAs), tax-free (like Roth IRAs) and taxable brokerage accounts. Drawing from taxable accounts first may allow tax-deferred savings to grow longer, but blending withdrawals can also help manage marginal tax brackets and avoid large spikes in taxable income.
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A financial advisor can help you build a retirement plan based on your assets, expenses and goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Jeremy Suschak, CFP®, is a SmartAsset financial planning columnist who answers reader questions on personal finance topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Jeremy is a financial advisor and head of business development at DBR & Co. He has been compensated for this article. Additional resources from the author can be found at dbroot.com.
Please note that Jeremy is not a participant in SmartAdvisor AMP, is not an employee of SmartAsset and he has been compensated for this article.
Photo credit: ©iStock.com/Courtesy of DBR & Co
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