What Allowing 401(k) Funds for Home Down Payments Could Mean for Retirement

The idea of more easily allowing Americans to tap into their 401(k) savings for a home down payment is making waves in the retirement world. 

National Economic Council Director Kevin Hassett said during a Fox Business interview Jan. 16 that the Trump administration was working on a proposal that would allow more Americans to tap into their retirement funds for a down payment, saying, “We’re going to allow people to take money out of their 401(k)s and use that for a down payment. We’re still talking about the mechanics of it.”  

Hassett did not provide any details on how such a plan would work, but under current law, homebuyers can already access 401(k) savings through loans or hardship withdrawals — often triggering taxes, penalties, or repayment requirements. 

President Donald Trump, though, said Jan. 22 that he opposed the plan endorsed by Hassett. 

“I like keeping their 401(k)s in great shape. I like keeping their 401(k)s. And I’m not a huge fan of that, putting down a deposit,” Trump said aboard Air Force One.  

Although it’s unclear if the proposal has been completely abandoned, it’s a topic that retirement experts are watching. The idea could have both pros and cons for Americans, experts said. 

“The potential for employees to withdraw 401(k) plan funds for this purpose is an intriguing opportunity to provide employees with enhanced flexibility around deploying their retirement savings and balance their near-term financial position with long-term retirement planning,” said David Amendola, senior director, retirement at consulting firm WTW in Norwalk, Conn. “If there are significant tax advantages and reasonable guardrails involved with this opportunity, it could be a beneficial way for employees to address a growing challenge for many individuals — the ability to afford a home purchase.” 

Home affordability has become a pain point for Americans, driven by a housing shortage, high mortgage rates, and rising rents. 

There are several important considerations employers would need to take into account for a plan like this, Amendola said, including whether the employee has sufficient savings to leverage for the withdrawal, the employee’s potential to impair their retirement readiness, and the employer’s ability to communicate the benefits and downsides of withdrawing funds for this purpose. 

At the same time, experts cautioned that making it easier for people to tap into their 401(k)s for a down payment could take a big hit on retirement readiness. 

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Retirement Borrowing 

When an employee borrows from their 401(k) plan or takes a distribution prior to retirement, it can potentially negatively impact the employee’s financial future, Amendola said.  

“Even if an employee eventually pays themselves back by restoring the funds withdrawn from the account, the employee will likely have paid interest on the loan amount and will also have lost out on the compounding earnings growth on the amount loaned during the time that such funds are outside of the plan,” he said. “There is also the possibility that the employee will not pay the loan back to the plan and thus be in default on the loan, resulting in the doubly detrimental effect of reducing the amount saved in the account and creating a taxable distribution, with an additional 10% early withdrawal penalty if the employee is under age 59½.” 

In general, most retirement experts encourage employees to leave their money in their 401(k)s without touching it. That’s especially the case because many are not prepared for retirement: Most employees are falling short of their retirement goals, according to various surveys, including a 2024 survey from Vanguard that found that Americans at all income levels are on track to fall short of what they need for retirement. 

But Michael Shamrell, vice president of workplace thought leadership at Fidelity Investments in Boston, said there is the reality that some people have financial emergencies or priorities that necessitate going into their nest egg early.  

“Life happens,” he said. Taking money prematurely out of a 401(k) is “something that we try to encourage to avoid it as best they can, with the understanding that sometimes you can’t help it.” 

When people take out a loan for a down payment, they will not only take a hit on retirement savings, but feel a pinch when they have loan payments with a high interest rate, as well as mortgage payments. That often causes people to scale back their retirement contributions, too, Shamrell said. 

“We want people to avoid getting into any situation where they pull back on their contribution,” he said. 

Shamrell said he’d like more conversations in the workplace around creating emergency and other financial cushions that are separate from retirement. “We use the term ‘emergency,’ but it’s really for any savings goal,” he said, which could include a home down payment. 

“This is really a good opportunity for employers to initiate conversations about building emergency funds,” he said.