Federal policymakers have been debating whether Americans should be able to pull money from their retirement accounts in order to afford a downpayment on a new home. While financial experts have cautioned against the idea, two studies released this month point to potential benefits.
As it stands, homeowners can take out a loan on their 401(k) for a down payment. They must then repay the loan with interest. For an IRA, they can withdrawal up to $10,000 to use on a down-payment on a home. Anything other than that incurs a 10% early withdrawal penalty from either kind of account.
But funding a down payment using retirement funds could make sense, the Urban Institute said in a study this month. The think tank examined a few ways to invest in a house—paying all-cash, versus putting some money down, and refinancing—and compared the returns they generated from 1987 to 2025.
Those who are maximizing their refinancing opportunities and don’t default can have comparable, or better, returns compared to investing in a retirement account, the study found.
“Based on financial returns, our empirical analysis confirms that funding a down payment with one’s 401(k) proceeds can be a winning proposition for millions of renters aspiring to buy their first home, especially if they remain active observers of market conditions and interest rate moves throughout their homeownership journey,” its researchers said.
Long-term investment
At the same time, the National Association of Realtors analyzed a bill currently stuck in Congress that would allow more IRA withdrawals without a penalty. First-time buyers can now pull up to $10,000 from their IRA without a penalty if it’s used for a down payment.
The “Uplifting First Time Homebuyers Act,” introduced by Reps. Todd Young (R-Indiana) and Ruben Gallego (D-Arizona) last year, would raise that to $50,000. But the bill, which has been introduced before, attracted no cosponsors and remains stuck in committee.
Gallego noted the $10,000 limit was set in 1997, when home prices were far lower. “By updating the decades-old IRA homebuyer exception to reflect the reality of housing costs today, this bill helps make homeownership possible for the next generation,” he said.
NAR just looked at the bare numbers. If you dropped $50,000 into a house and $50,000 into the S&P 500 a decade ago, how much would it be worth now? For the stocks, the answer is $79,687.
In virtually all of the 171 major housing markets, the housing investment beat the stocks. And while that’s expected in some boomtowns—a $50,000 investment in San Jose real estate in 2016 comes to $1.25 million today—it’s also true in small markets far from the coasts. You’d still have doubled your money in Topeka, for instance, where the investment would’ve grown to about $120,000.
“For policymakers and housing economists, the key question is not whether retirement savings should replace traditional down payment savings,” NAR’s Nadia Evangelou wrote. “It is whether the current policies reflect today’s housing market where home prices, down payments and closing costs are substantially higher than they were when the $10,000 limit was first created nearly 30 years ago.”
Trump administration floated idea
White House National Economic Council Director Kevin Hassett unveiled the idea of tapping retirement funds on Fox Business on Jan. 16, suggesting Trump might discuss it more at the World Economic Forum in Davos. But Trump’s Davos speech, while focused on affordability, didn’t discuss the subject.
In a media scrum on Air Force One as he departed Davos, Trump said Jan. 22 he wasn’t as enthusiastic about the idea. The suggestion faded from the headlines amid other priorities, such as the bipartisan housing bill, the 21st Century Road to Housing Act, which didn’t include any changes to 401(k) withdrawals among its nearly 50 provisions.
“It’s something I’m not a huge fan of, other people like it,” Trump said. “One of the reasons I don’t like it is that their 401(k)s are doing so well, 401(k)s are up 80%, 90% in some cases. You’re talking about a lot of people.”
“The housing market is good, but the 401(s) are doing much better than the housing market,” Trump said. “I like keeping the 401(k)s in great shape.”
Meanwhile, Virginia Rep. John McGuire, a Republican, introduced H.R. 7185 on Jan. 21, which would remove penalties from 401(k) withdrawals for a down payment on a home. While it attracted five other Republican cosponsors, the bill never advanced out of committee.
“Family members aiding their relatives with closing costs and down payments aren’t just funding a house, but a home for generations to come,” McGuire said in a statement. “This Act is ending a cycle of throwing away money in renting and helping young people invest in their future.”
Expert advice
Pulling money from a 401(k) is a financially risky move, and experts suggest carefully assessing the financial implications. It can delay retirement and harm financial stability long-term.
Many financial experts have strongly cautioned against the idea, worried it could have a major impact on your retirement and future.
Harrison Beecher, managing partner of D.C.-based Coalition Properties Group, told attendees at an NAR event to advise clients carefully about tapping retirement plans. He’s most concerned about communities with lower financial literacy withdrawing the money without fully understanding the risks.
“The same way we have an amortization schedule on a mortgage, people should be looking close at that time value of money that they’re leveraging to buy a house,” Beecher said.
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