Should You Get a 401(k) Loan for Home Renovations?

If you’re dreaming of a new kitchen, an updated bathroom, or a finished basement, you’re not alone. Home improvements can add comfort, increase your home’s value, and make your space feel more like your own. But they can also come with a hefty price tag—one that has many homeowners asking: “Should I get a 401(k) loan for my home renovation?”

While it might be tempting to tap into your retirement savings to pay for home renovations, it can have long-term consequences. Let’s explore the pros, cons, and smart alternatives to help you make a confident, well-informed decision.

What is a 401(k), and how does it work?

A 401(k) is a tax-advantaged retirement savings account sponsored by your employer. You contribute pre-tax dollars from your paycheck, which can grow tax-deferred over time. Many employers even match a portion of your contributions—free money for your future.

There are 2 main ways people access their 401(k) before retirement:

• Loan: You borrow money from your account and pay it back—with interest—over time.
• Hardship withdrawal: You permanently withdraw funds, typically for an urgent financial need.

Both options have risks, especially when the funds are used for non-urgent expenses, like home renovations.

The risks of a 401(k) loan for home renovation

Borrowing from your 401(k) may feel like an easy way to access cash you need, but there are some serious downsides to consider:

1. You may face steep penalties and taxes

If you take a hardship withdrawal, you’ll likely owe income tax on the amount you withdraw—and if you’re under 59½, you may also get hit with a 10% early withdrawal penalty. That means pulling out $20,000 could cost you thousands in taxes and fees alone.

2. You’re reducing your retirement savings

The money you withdraw isn’t just your savings—it’s funds that are set up for future compound growth. Even if you plan to replenish your account, the missed time in the market can significantly reduce your retirement nest egg.

To illustrate how that works, let’s say you withdraw $30,000 at age 40. At an average 7% annual return, that $30,000 could grow to more than $114,000 by age 65 if left in your 401(k).

3. You could jeopardize your long-term financial goals

Retirement accounts are designed for your future. Using them for short-term goals—even meaningful ones like home renovations—can throw off your long-term plans and reduce your financial security later in life.

Is a 401(k) loan for home renovations better than a withdrawal?

In some ways, yes. A 401(k) loan doesn’t come with the same tax penalties as a withdrawal. You repay the loan (with interest) to yourself over a set term—typically up to 5 years. That said, it’s not risk-free.

Here’s what you should know:

• Loan limits apply. You can typically borrow up to 50% of your vested balance, or $50,000, whichever is less.
• You’ll repay with after-tax dollars. And when you withdraw that money in retirement, it’s taxed again.
• Leaving your job can trigger repayment. When you leave your employer, the remaining balance may be due in full—or it will be considered a taxable withdrawal.

So while a 401(k) loan for home renovations can be a better option than a hardship withdrawal, it still comes with trade-offs that could impact your retirement and financial flexibility.

Better options than a 401(k) loan for home renovations

You don’t have to raid your retirement account to afford the home upgrades you want. Here are some alternatives that can offer more flexibility and fewer long-term consequences:

1. Use a personal loan

A personal loan may offer a fixed interest rate, predictable monthly payments, and fast funding. You can use it to cover renovation costs without putting your home—or your retirement—on the line.

It’s a smart option if:

• You have good credit
• You want to avoid tapping into your home’s equity
• You prefer a structured repayment over credit cards

Use our personal loan calculator to see what your monthly payments could look like.

2. Tap into your home’s equity

If you’ve built up equity in your home, a home equity loan or a HELOC could help you fund larger renovation projects. This type of loan uses your home as collateral and typically offers lower interest rates than unsecured options.

This can be a great choice for major projects that increase your home’s value, but there are some downsides to this type of loan, including:

• The approval process may take longer
• You may need a formal appraisal
• It may put your home at risk if you default

3. Budget and save in advance

If your project isn’t urgent, consider creating a dedicated savings plan. Set aside a portion of your monthly income until you reach your goal. This approach takes longer, but it eliminates the need for debt or penalties—and gives you full control over your timeline.

Considerations before getting a 401(k) loan for home renovations

Still thinking about using your 401(k)? Before making any moves, ask yourself:

• Is this project essential or cosmetic?
• Do I have other funding options that won’t impact retirement?
• Can I afford the tax consequences and repayment terms?
• How will this decision affect my long-term goals?
• Am I making this decision based on urgency or convenience?

Taking time to reflect helps you make a confident, informed choice.

Consider your future before deciding

Your home is one of your most important investments—but so is your retirement. Using your 401(k) to fund home renovations may seem like a quick solution, but it often comes at a high cost. Before you touch your retirement savings, explore other options. Whether it’s a personal loan, home equity loan, or a well-planned savings strategy, there are smart ways to fund your dream home without sacrificing your future.

This article is for educational purposes only and is not intended to provide financial, tax or legal advice. You should consult a professional for specific advice. Best Egg is not responsible for the information contained in third-party sites cited or hyperlinked in this article. Best Egg is not responsible for, and does not provide or endorse third party products, services or other third-party content.