A 27-year-old guest on Caleb Hammer's Financial Audit had already cashed out her 401(k) twice by the time she sat down with him — once in 2019 and again in 2020 — with some of the money going toward the down payment on her first home.

"I have taken out my 401(k)," she told Hammer in a November 2023 clip posted to TikTok. "Multiple times."

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"Multiple times. Why!?" Hammer shot back.

Hammer told her exactly where that left her. "You're desperately behind on retirement for the second half of your 20s," he told her. "And you've lost the best decade of your life for compound growth. That's beyond disappointing."

Hammer, 31, hosts Financial Audit out of Austin, Texas, where he combs through guests' budgets and bank statements for more than 3 million YouTube subscribers. Most weeks that means high credit card balances or side hustles gone wrong, but back-to-back 401(k) cash-outs was an unexpected twist that Hammer had a lot to say about.

Her explanation didn't help her case. "People have told me you can just take it out," she said.

"Well, yes, of course you can, with penalties and taxes," Hammer said. "There's a lot of things you can do. You can go murder someone right now, there will still be consequences."

She told Hammer she regrets the withdrawals now, but here's the problem: Pull money out of a 401(k) before age 59 1⁄2, and the IRS generally adds a 10% penalty on top of ordinary income tax. Buying a first home doesn't get you off the hook, and neither does taking the money as a hardship withdrawal.

Hammer figured she likely paid that penalty, and he wanted to know why money she planned to spend on a house was sitting in a retirement account in the first place.

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About 41.4% of workers who left jobs between 2014 and 2016 withdrew at least a portion of their 401(k) savings, according to a study of 162,360 employees published in Harvard Business Review — and 85% of that group emptied their accounts entirely.

Job loss doesn't explain most of it, either — only 27.3% of those who cashed out had been laid off or fired, according to the UBC Sauder School of Business, whose researchers co-authored the study.

The good news is you don't need to raid a retirement account to buy a first home. Fannie Mae-backed conventional loans let eligible first-time buyers put as little as 3% down, and FHA loans start at 3.5%, according to the Department of Housing and Urban Development.

If you really do need to reach into a 401(k), consider a loan instead of a withdrawal. The IRS lets you borrow up to half your vested balance, capped at $50,000, with no tax or penalty as long as you pay it back on schedule. Just know that if you leave your job with the loan unpaid, the remaining balance can get treated as a withdrawal, taxes and penalty included.

And if your money is in a Roth IRA, you have more flexibility than you might think. You can pull out your contributions — though not the earnings on them — at any time, tax- and penalty-free, whether you're buying a house or not. If the clip has you realizing you're behind on your own retirement savings, there are ways to catch up that don't involve touching a house fund.

As for the advice she was given, it wasn't entirely made up. The IRS really does let first-time homebuyers withdraw up to $10,000 penalty-free — but from an IRA, not a 401(k). The people who told her she could "just take it out" skipped that part.

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This article originally appeared on Moneywise.com under the title: Caleb Hammer blasts 27-year-old who cashed out her 401(k) twice to fund a home down payment — with penalties

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