Trump’s 401(k) proposal could help homebuyers, hurt retirement funds

President Donald Trump’s expected proposal to allow Americans to tap their 401(k) retirement accounts without penalties to fund down payments could ease one of the biggest barriers to homeownership, but it could come at the cost of weakening long-term retirement security.

The idea was absent from Trump’s speech on Wednesday at the World Economic Forum in Davos, Switzerland. Instead, the president pointed to record equity-market gains as evidence that Americans are financially better positioned.

“Since the election, the stock market has set 52 all-time high records — that’s in one year, 52 records — adding $9 trillion in value to retirement accounts, 401(k)s and people’s savings. People are doing very well. They’re very happy with me.”

Under current rules, consumers can withdraw from a 401(k) without penalty at age 59½ — or at 55 if they leave or lose their job. Early withdrawals generally trigger a 10% penalty and the amount is taxed as income.

White House National Economic Council Director Kevin Hassett confirmed on Friday that the administration was actively working on a proposal to waive that penalty for home purchases.

“Suppose that you put 10% down on a home and then you take 10% of the equity of the home and put it in as an asset in your 401(k),” Hassett said in an interview with Fox Business Network. “Then your 401(k) will grow over time as the value of your house grows. … More money for retirement and you’ll have solved the liquidity constraint problem and gotten yourself a house early in life.”

Pressure on housing supply

Any changes to 401(k) withdrawal rules would require congressional approval, industry experts note. But if enacted, the policy could materially increase homebuyer demand and have consequences for home prices.

A recent NerdWallet survey found that 22% of Americans planning to buy a home in the next 12 months expect to tap their own or a partner’s retirement savings for a down payment.

“If making it easier to use 401(k) withdrawals for down payments pulls more buyers into the market, then yes, that competition could certainly push home prices up,” said Kate Wood, NerdWallet’s lending expert. “We don’t need to create more demand for houses.”

Another NerdWallet study shows that 15% of Americans — or roughly 40 million people — say they plan to buy a home in the next year. By comparison, about 4.7 million homes were sold in 2024, including both new and existing properties.

“Even if we consider that a large proportion of those hoping to buy end up delaying or cancelling their home searches, there’s still a substantial mismatch between the number of potential buyers and the inventory of homes for sale,” Wood added.  

Blown retirement plans?

Consumer advocates warn that penalty-free withdrawals risk undermining retirement preparedness, especially for younger Americans.

Jackie Boies, senior director of housing services at nonprofit Money Management International (MMI), said the proposal could boost homeownership but at the expense of compounded, tax-deferred growth. 

“We’re super conservative at MMI when it comes to borrowing or taking out assets like this, even to purchase a home,” Boies said. “There are other ways to buy a home that borrowers should explore first — not saying that you don’t ever go there to the 401(k) — down payment assistance programs, gift funds from family who can help, and then just your own savings.” 

While tapping a 401(k) can be a “godsend” for disciplined savers who later replenish the funds, Boies said such households are the exception, not the rule. At the same time, borrowers may be tempted to use retirement savings since doing so can unlock better loan terms.

She added that many consumers seeking financial or housing counseling already qualify for some form of down payment assistance, with only a small share seriously considering a 401(k) withdrawal.

“Probably 5% to 10% of those that we counsel with for homeownership have talked to us about using their 401(k), or they are already planning to use it,” Boies said. “It’s definitely not the majority in today’s world; that penalty and the tax implications are enough to sort of make people think twice about using funds.”

To illustrate the long-term cost, Wood noted that $10,000 invested for 30 years at a 7% annual return would grow to more than $81,000 — an opportunity cost many early-career homebuyers would forgo.

But for older buyers further along in life, tapping a 401(k) may more closely align with the account’s intended purpose: to fund expenses later in life.

“Down payment assistance is certainly helpful, but your retirement savings might not be the wisest place to look,” Wood said. “Down payment is just one piece in the affordability puzzle (…) High home prices, coupled with rising costs for property taxes and homeowners insurance, are making it harder for folks to afford the ongoing costs of homeownership.”