The Trump administration’s new housing plan promises to help Americans achieve homeownership by allowing penalty-free withdrawals from 401(k) retirement funds for down payments. On the surface, it sounds appealing: tap into your own savings to buy a house without the usual 10% early withdrawal penalty from the IRS. But financial experts warn this solution to the housing affordability crisis could create a retirement crisis instead.
To understand the true cost, consider what happens when you withdraw $150,000 from your 401(k) at age 35 to buy a home. That decision doesn’t just affect your bank account today — it fundamentally alters your financial trajectory for the next three decades.
The Proposal and the Problem
“Suppose that you put 10% down on a home, and then you take 10% of the equity of the home and put it as an asset in your 401(k),” White House economic adviser Kevin Hassett said Friday. “Then, your 401(k) will grow over time as the value of your house grows.”
Hassett’s reasoning acknowledges a genuine crisis: down payment costs have doubled from an average of $15,000 pre-pandemic to $30,000 now. A Realtor.com analysis found it now takes families about seven years to save that amount, twice as long as before. For many would-be homeowners, that timeline feels impossibly long, especially as home prices continue climbing.
Dipping into a 401(k) could accelerate the process. But only about half — 54.4% — of Americans have a retirement account, and even fewer have 401(k)s, according to Federal Reserve and Congressional Research Services data. This means the proposal would help only a subset of Americans who are already in relatively stable financial positions.
Who This Really Helps (and Who It Doesn't)
Sergio Altomare, CEO of real estate private equity and development firm Hearthfire Holdings, told NewsNation the people who need the most help are also the least likely to benefit from Trump’s plan.
“There’s still a lot of work that needs to go into addressing affordability for the individuals on the lower rung of the income chain,” he said. “To me, this will not address that.”
Altomare estimates a worker would need to be 35 to 40 years old with steady employment to even have enough saved for the plan to work. Younger workers haven’t had time to accumulate substantial retirement savings, while lower-income workers may not have access to employer-sponsored 401(k)s at all.
“Something like this on the 401(k), on its own, you may increase access for some portion of the population, but we know that a lot of people won’t be impacted,” he said.
The Math: $150,000 Now vs. Later
Let’s examine the real cost through a concrete example. Imagine a 35-year-old worker withdraws $150,000 from their 401(k) for a down payment instead of keeping it invested for retirement. Assuming a conservative 7% annual return — roughly the historical average for diversified portfolios — that $150,000 would grow to approximately $1.14 million by age 65.
Even accounting for home equity appreciation, the comparison rarely favors the early withdrawal. If that same $150,000 goes toward a down payment on a home that appreciates at 4% annually (near the historical average), the portion of home equity attributable to that down payment would grow to about $487,000 in 30 years. That’s less than half what the money would have become in a retirement account.
The disparity grows even wider when you factor in opportunity costs. Money withdrawn from a 401(k) loses the benefit of tax-deferred compounding. Meanwhile, you can’t contribute that withdrawn amount back into your 401(k) beyond annual contribution limits (currently $23,000 for 2024). You’ve permanently reduced your retirement savings capacity.
Additionally, while you build home equity, you’re also paying mortgage interest, property taxes, insurance, and maintenance — costs that don’t exist with retirement investments. These expenses can consume thousands of dollars annually, further reducing the net benefit of homeownership compared to continued retirement investing.
The Hidden Risks
Even if a person accesses their retirement for a down payment, it is essentially robbing future retirement funds — and that has to be made up somewhere down the road, Altomare noted.
“For something like this to really take hold and take shape, No. 1 is it’s got to come with an education component around it. What are the risks?” Altomare asked. “What are the ramifications of hitting your 401(k) early? Maybe adding some limits to it so people don’t deplete it to buy their dream home too soon.”
The risks extend beyond simple mathematics. Using retirement funds for a down payment creates several vulnerabilities:
Market timing risk: Withdrawing during a market downturn locks in losses that would recover if investments remained untouched.
Job loss vulnerability: Without substantial retirement savings, losing employment becomes more financially catastrophic.
Healthcare costs: Retirees with depleted savings face greater risk if medical expenses exceed Medicare coverage.
Inflation erosion: Smaller retirement accounts provide less buffer against decades of inflation between now and retirement.
Alternative Approaches
Financial advisors typically recommend exhausting other options before touching retirement funds. These include first-time homebuyer programs, FHA loans requiring just 3.5% down, down payment assistance programs, or simply buying a less expensive starter home.
Some suggest the government could better address housing affordability through increased housing supply, zoning reform, or direct down payment assistance programs that don’t jeopardize retirement security.
The Bottom Line
Whether there will be limits on how much can be withdrawn is still unclear. Trump is expected to fill in more details about the plan this week at the World Economic Forum in Switzerland.
Until then, prospective homebuyers should approach this option with caution. The opportunity to buy a home today by sacrificing $150,000 in potential retirement savings might cost you over $600,000 in lost growth — a price far steeper than any IRS penalty. For most Americans, the dream home bought with retirement funds could become the nightmare of retiring without adequate resources.
