If you're struggling to save enough for a home down payment, a 401(k) loan might look like a quick and easy solution, especially if you have more money stashed in that account than anywhere else.

Among Americans with retirement accounts, including 401(k)s, the median account value was $65,000, according to the Federal Reserve's Survey of Consumer Finances, based on the most recently available 2019 data. The median value of transaction accounts, such as savings, checking and money market accounts, was $5,300.

Many employer plans allow 401(k) loans, and the upsides can be attractive: Essentially, you're borrowing from and paying interest to yourself. The loan generally doesn't count as debt when lenders calculate your debt-to-income ratio.

But borrowing from retirement savings has downsides, and some financial planners advise against it, period.

"I generally hate the idea of people borrowing from a 401(k) to purchase a home, given the possible risks," says JP Geisbauer, a certified financial planner and principal of Centerpoint Financial Management in Irvine, California.

Yet Nathaniel Moore, a certified financial planner and president of Agape Planning Partners in Fresno, California, says he understands why someone would be tempted. "If it means going from paying high rent to getting into a place you own, I get it," he says.

Here's what to consider if you're thinking about it.

Rules for borrowing

Most 401(k) plans permit loans, but federal law doesn't require them to. Log on to the website where you track your 401(k) to find loan information or contact your employer's human resources department or plan administrator.

Some loan terms vary among employer plans, but all plans must abide by federal rules:

• Loans are capped at $50,000 or 50% of the vested account balance, whichever is less —  or up to $10,000 if 50% of the vested balance is less than $10,000. If your balance is $200,000, you may be able to borrow up to $50,000. If your vested balance is $70,000, the maximum loan amount would be $35,000.

• You have a set amount of time to repay the loan plus interest; otherwise, it will be considered a distribution or withdrawal. You'd pay income tax on a distribution and, if you're younger than 59 1/2, an additional 10% tax penalty. The plan sets the interest rate, typically 1% or 2% above the prime rate. 

• Generally, 401(k) loans must be repaid in five years, but a plan can give more time to repay a loan for purchasing a primary home. Payments must be made at least quarterly over the loan term. 

• If you get fired or quit your job, the plan can require you to repay the full outstanding loan balance. If you can't pay, the unpaid amount will be subject to taxes and, if you're under 59 1/2, the 10% tax penalty. You can avoid the tax implications by rolling over the outstanding balance to an IRA or another eligible plan by the next annual federal tax filing deadline. About 4 in 10 Vanguard plans allowed participants to continue repaying loans after leaving their jobs in 2021, according to a 2022 Vanguard report. 

Risks of using a 401(k) loan

Even if you're convinced a 401(k) loan is the way to go, it's important to understand the risks at the outset.

One is the potential tax burden if you can't make the quarterly loan payments or leave your job and can't repay the outstanding balance on time.

You could also fall behind on saving for retirement. Besides losing potential investment gains on the borrowed money, the loan repayments could crimp your ability to contribute to your 401(k). In fact, some plans don't allow employees to make regular contributions until the loan is paid off, says AnnaMarie Mock, a certified financial planner with Highland Financial Advisors in Wayne, New Jersey. Pausing contributions would be especially costly if you missed out on matching contributions from your employer.

But there's another less-obvious risk, which Moore finds particularly troubling: Once you've taken one loan, it gets easier to tap into it again. "You're reprogramming your mindset to where now the 401(k), which was designed to be protected and provide income in the future, is accessible," he says.

Loan costs, repayment and alternatives

Take these steps if you're thinking about borrowing from your 401(k):

Check your plan's rules for 401(k) loans

Get details about the interest rate, fees, payment amounts and how long you'd have to repay the loan.

Calculate whether you can afford loan payments

Tally the loan payments along with other obligations.

"That 401(k) loan is going to get taken out of your salary right from the start, so make sure that with the new home expenses, your lifestyle expenses and saving, you're not operating at a deficit each month," Mock says. If the loan payments are unaffordable, she says, "the only other place where you're going to be able to support that lifestyle would be from credit card debt, which is very expensive."

Learn what happens if you leave your job

If the plan requires paying the outstanding balance in short order — as most plans do — strategize how to repay that sum to avoid tax consequences.

Consider alternatives

Finally, check out other options to help buy a house, such as low-down-payment mortgages and your state's first-time home buyer programs, Mock advises. Perhaps one of those could eliminate the need for a 401(k) loan.

Some conventional loans have down payments as low as 3%. FHA loans, insured by the Federal Housing Administration, have down payments as low as 3.5%. And if you're a service member or veteran, you may qualify for a zero-down-payment VA loan backed by the U.S. Department of Veterans Affairs. USDA loans for rural home buyers also don't require down payments.

State first-time home buyer programs offer down-payment and closing-cost assistance. These programs also offer low-down-payment loans from approved lenders.

Still want a 401(k) loan?

Moore offers these tips:

• Take only what you need, which may be less than the maximum you can borrow.

• Be aggressive with repayment. Just because you have a certain number of years to repay the loan doesn't mean you have to use all that time. "Try to pay it back as fast as possible."