Last month, Kevin Hassett, Director of the National Economic Council, floated the idea of allowing limited 401(k) withdrawals to support homeownership. Appearing on “Mornings with Maria” on FOX Business News, Hassett said the White House was considering announcing they would allow people to take money out of their 401(k)s and use that for a down payment. “The typical monthly payment about doubled for an ordinary family buying an ordinary home. And the down payment they needed to buy a home went from about $15,000, to about $32,000. And so there’s a real lot of room to make up,” Hassett said before leaving for the World Economic Forum in Davos, Switzerland.
But on the way back from Davos, President Trump expressed second thoughts about the idea. “I’m not a huge fan,” the President told reporters on Air Force One. “Other people like it. They’re talking about taking money out to put a deposit down on a home. One of the reasons I don’t like it is that their 401(k)s are doing so well. You know, 401(k)s are up 80-90% in some cases,” the President said. “The housing market is good, but the 401(k)s are doing much better than the housing market. I like keeping their 401(k)s in great shape.”
However, the President also has recognized that millions of Americans have built tremendous wealth as home values have risen to record levels. Earlier on the trip, President Trump recognized that “house values have gone up tremendously, and these people [current homeowners] have become wealthy. They weren’t wealthy. They’ve become wealthy because of their house.” He also expressed concern that if we address the housing crisis in the wrong ways, we risk “hurting the value of those houses, obviously, because one thing works in tandem with the other.” That isn’t a good outcome for anyone. The good news is, as I said in the Wall Street Journal last week, this can be a win-win scenario. It’s not a zero-sum game. During the interview the reporter asked me, if addressing affordability and keeping home values high isn’t “having your cake and eating it too?” Well, no. Not in the way we usually use that idiom. But isn’t the whole point of baking a cake to eat it?
Some progressives have also expressed concern that people might misuse their retirement accounts, have their home equity stripped by predatory lenders, or undercut existing down payment assistance programs. All of these concerns must be fully addressed and mitigated. So, let’s take a closer look at the potential impact of permitting limited 401(k) withdrawals for first-time homebuyers or retirees who take advantage of the program and on the broader equity market; how it could be structured, and how to do so in a way that reasonably manages the risks expressed by the President and others.
Eliminating any risk can only be done by doing nothing. This has been the policy failure of far too many good ideas. The concerns expressed by some on the right and left are risks that must be mitigated and managed, not eliminated. We can do this by limiting the program to a one-time tax and penalty-free withdrawal not to exceed 50% of the value of a 401(k) balance for a first-time homebuyer to purchase a home that will be owner-occupied with a Qualified Mortgage. Restrictions on flipping or cash-out refinancing, as well as homeownership and wealth management counseling by HUD-approved agencies are also important.
As I see it, there are four key questions that must be answered satisfactorily to garner broad bipartisan support for this proposal.
- Is investing retirement savings in owner-occupied real estate better than leaving the funds in a 401(k) account?
- Would significant use of such a program risk weakening the strength of U.S. equity markets?
- Are existing consumer protections sufficient to protect homebuyers from losing their homes and a significant portion of their retirement savings as a result?
- Does this type of approach serve first-time homebuyers who need these resources most?
Is buying a home a prudent investment as part of a broader retirement strategy?
The starting point in this debate is intuitive and often framed in moral terms: “you should never touch your retirement account.” That rule of thumb has some value, but we aren’t talking about using it to pay off credit cards or buy a car. We are using withdrawn funds for another investment – real estate. And this investment includes an important perk: you get to live in it. You get to live in it rent free. You can’t live in your 401(k). What matters is how the cash flows actually perform over time. When we line up renting and leaving the 401(k) intact against buying with a one-time 401(k) withdrawal, the math is far more nuanced than most critics acknowledge.
At a 10‑year holding period, a penalty and tax-free $25,000 withdrawal requires about 1 percent average annual home price appreciation to break even with renting; at $50,000, the break‑even appreciation is roughly 1.4 percent, and at $75,000 it is about 2 percent. By 15 years, a $25,000 withdrawal breaks even if home prices decline slightly, around -0.3 percent a year, while $50,000 and $75,000 withdrawals need only about 0.2 and 0.7 percent annual appreciation, respectively. At 20 years, all three scenarios break even or better even with modest home price declines.
The bottom line: even with home price appreciation far below historic levels, investing 401(k) funds in a first home is a sound investment with a significant payoff. NHC will be refining its model with stakeholders over the coming weeks.
Could the stock market be hurt by allowing penalty-free withdrawals?
Another concern is that moving money out of 401(k) accounts could damage the broader equity market. Here again, the numbers are compelling.
Roughly 1.2 to 1.6 million homes are purchased annually by first-time buyers; for modeling purposes, we assumed 1.3 million. Not all of these households have a 401(k) with a meaningful balance. If we assume that roughly half of first-time buyers are under 50 and that 50–60 percent of those younger buyers have a 401(k) large enough to participate, that yields on the order of 700,000 potentially eligible households per year.
Even then, not everyone will use the option. Using three participation scenarios—10 percent, 25 percent, and 50 percent of eligible first-time buyers under 50—we get between 70,000 and 350,000 withdrawals per year. If the average withdrawal is $75,000, that implies annual withdrawals of about $5.3 billion in the low-participation scenario, $13.1 billion in the moderate case, and $26.25 billion in the high case.
Even in a very aggressive participation scenario, the entire year’s worth of additional equity selling would amount to less than half of a percent of total market capitalization and would be smaller than a single ordinary trading day’s volume. Corporate stock buybacks alone can run over $1 trillion per year, while mutual fund flows, pension rebalancing, and ETF activity routinely move far larger sums without any discernible systemic effect.
Are consumer protections adequate to protect participating homebuyers?
If we are going to tell people they may touch their retirement nest egg to buy a home, we need to ensure that participating buyers are not steered into abusive loan products, stripped of equity, or set up to fail.
Federal and state consumer protection regimes are stronger today than they were in the run-up to the 2008 crisis. The Ability-to-Repay and Qualified Mortgage rules have sharply limited the most toxic mortgage designs and have gone a long way toward reducing the worst abuses in the mortgage market.
But the introduction of a new down payment assistance mechanism tied to retirement accounts may attract new opportunities for abuse. We should anticipate and manage that risk, not discover it in the next set of foreclosure statistics or avoid it by preventing anyone from participating in the opportunity.
Several safeguards are worth serious consideration:
- Require that any tax and penalty-free 401(k) withdrawal for home purchase be paired with independent, HUD-certified housing counseling, so that buyers understand both the upside and the risks, including the consequences of job loss, divorce, or a local housing downturn.
- Limit the option to fully-amortizing, fixed-rate mortgages so the withdrawal is not used to stretch into speculative or exotic products.
- Monitor marketing practices around retirement-fund-for-down-payment products and act quickly if abuses emerge.
HUD’s housing counseling program already provides pre-purchase counseling that has been shown to reduce delinquency and default rates. Integrating that infrastructure into a 401(k) withdrawal policy would be a natural extension.
Will lower-income Americans who cannot use their retirement accounts be left behind?
What about families who have little or no money in a 401(k)? Are we simply creating another advantage for households who have already managed to save, while leaving low-income renters further behind?
Participation in workplace retirement plans is uneven, and balances are heavily skewed toward higher-income, longer-tenured workers. A policy that opens the 401(k) as a down payment piggy bank but does nothing else will be most immediately useful to middle- and upper-middle-income households with steady employment histories. Those are important constituencies, but they are not the entirety of the homeownership challenge.
The right way to think about this proposal is not as a substitute for traditional down payment assistance and affordable mortgage products, but as a complement to them. If a penalty-free 401(k) withdrawal option is enacted, Congress and the administration should also:
- Protect and expand down payment assistance programs that serve low- and moderate-income buyers who lack retirement savings but can sustain a mortgage.
- Preserve robust funding for housing counseling, credit repair, and loss-mitigation efforts that stabilize homeownership for vulnerable households.
- Design the 401(k) feature in a way that does not displace existing grants or second-mortgage assistance that would otherwise go to lower-income buyers. For example, withdrawals could be capped or coordinated with program administrators.
To ensure the program serves first-time buyers who most need assistance while protecting both participants and the broader economy, the policy should include clear eligibility parameters. Limiting the program to first-time homebuyers under age 50 ensures that participants have sufficient time—typically 15 to 20 years or more—to rebuild their retirement savings before reaching retirement age. This age threshold aligns with the tenure assumptions that make the withdrawal financially viable and reduces the risk that participants will deplete retirement accounts too close to when they will need them.
Similarly, capping household income eligibility to 150% of the area median income would focus the program on middle-income families who face genuine affordability constraints, rather than subsidizing high earners who have other paths to homeownership. An alternative approach would be to impose no income limit but cap the home price to 150% of the area median home price. Either design choice would help ensure that the program functions as targeted assistance rather than a tax shelter for high-income renters.
What this means for the policy debate
It is increasingly clear that allowing limited, penalty-free withdrawals from retirement accounts for first-time homebuyer down payments can be wealth-enhancing under reasonably conservative assumptions, even with modest nominal appreciation.
This approach would represent the largest down payment assistance program in American history—not funded by taxpayer dollars, but by unlocking wealth that working families have already saved. It deserves serious consideration.