Bill Would Allow 401(k) Savers to Withdraw Funds for Down Payment

A House bill that would allow 401(k) savers to make withdrawals for purchasing a home without penalties has been introduced. Retirement experts see potential benefits and drawbacks to the proposal.

U.S. Representative John McGuire, R-Va., on Jan. 23 introduced the Home Savings Act, which would amend the Internal Revenue Code of 1986 to allow 401(k) savers to make penalty-free withdrawals from their accounts for down payments or closing costs on a primary residence. It would allow individuals to withdraw funds for up to five years without penalty. 

The proposed legislation would also allow an individual to make a penalty-free 401(k) withdrawal and gift those funds to a relative, exempt from gift tax, provided the relative uses the money for a down payment or closing costs on a primary residence. 

“For many, owning a home is the American dream but it’s been out of reach for far too long,” McGuire said in a statement. “Too many Americans are becoming lifelong renters. This bill will pave the way for removing financial barriers to home ownership. Family members aiding their relatives with closing costs and down payments aren’t just funding a house, but a home for generations to come. This act is ending a cycle of throwing away money in renting and helping young people invest in their future.” 

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

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The bill’s introduction comes shortly after 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.”  

But President Donald Trump 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. Given Trump's opposition to the idea, as well as the fact that the Home Savings Act has no co-sponsors, nor a companion Senate bill, the legislation's future is uncertain.

Retirement experts said they are following the news, telling SHRM that more easily allowing Americans to tap into their 401(k) savings for a home down payment could have both pros and cons. 

The potential for employees to withdraw 401(k) plan funds for a down payment 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.”  

But experts also 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, which is already fragile.

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.