Trump’s 401(k) Home Buyer Idea Requires Retirement Rule Shifts

A forthcoming White House proposal to allow use of 401(k)s for down payments on home purchases would mean shifts in long-held regulations on plan withdrawals, and possibly new legislation.

President Donald Trump is expected to unveil the plan the week of Jan. 19 at the World Economic Forum in Davos, Switzerland, National Economic Council Director Kevin Hassett said Friday.

Hassett said on Fox Business that the administration was still discussing the specifics. The planned announcement comes as the president has made a political push around affordability, including making housing more accessible.

“It’s certainly an interesting proposal, and I think what we’ve seen over the last few years, certainly with legislative advancements, are a lot of newer opportunities for people to tap into their retirement accounts, to do other things besides save for retirement,” said Eric Paley, leader of the employee benefits and executive compensation team at Nixon Peabody.

Withdrawing funds from a retirement account covered by the Employee Retirement Income Security Act to pay for a home is a new policy idea that would stretch beyond the statute and accompanying regulations’ usual bounds.

401(k) plans under ERISA are generally designed to keep accruing pre-tax dollars until a saver reaches retirement age.

There are strict rules from the IRS and the Labor Department’s Employee Benefits Security Administration about when and how a plan participant can begin to take distributions. Currently, if they do so before reaching age 59 ½, they face a 10% penalty, plus income tax.

Exceptionshave been added over the years where the penalty does not apply, such as if an individual becomes permanently disabled or in the case of disaster-related losses, though many of those withdrawals are subject to dollar limits.

Participants can also borrow against their 401(k)s, but borrowing is capped at $50,000 or 50% of the account balance. Smaller 401(k)s often won’t allow loans due to low balances and lack of processing capacity.

One possible example for the administration, along with EBSA and IRS regulators who would likely wind up hashing out the details of Trump’s plan, comes in the form of individual retirement accounts.

Though they’re often not governed by ERISA, current rules allow first-time homebuyers to withdraw up to $10,000 penalty-free from IRAs, subject to income tax.

Paley said any new policy could mirror the existing regulations around the IRA withdrawal for first-time homebuyers.

Legislation Likely

Paley said he would not be surprised if the administration attempted to add a home-owner exception via executive order, but said “realistically” the change would require legislation.

That could be accomplished through a larger legislative package focused on retirement benefits, he said, similar to the SECURE 2.0 Act signed into law in 2022.

That law created new exceptions for penalty-free withdrawals, such as for domestic abuse victims or those with a terminal illness.

But with both chambers of Congress narrowly divided and the midterm elections on the horizon, getting bipartisan support, especially in the short-term, could be difficult.

“I don’t think there is any sort of catch all provision currently under the law that would permit, say, the IRS or the Department of Labor to, on its own, generate a new exception to the rules that otherwise prohibit people from taking money out of their plans,” Paley said.

But there are other nuances that employers and retirement benefit managers will be watching for once Trump unveils more details.

“We’re still talking about the mechanics of it, but 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), then your 401(k) will grow over time,” Hassett said Friday.

Michael Kreps, who is the retirement services chair at Groom Law Group, described Hassett’s example of reinvesting funds in 401(k)s as both a policy issue and an administrative one that would require broad relief from either Congress or the Department of Labor.

“It’s not as simple as let everyone own houses in their 401(k). It’s highly regulated,” Kreps said. “You would need a lot of relief to make that work and somehow figure out administratively how a recordkeeper is going to deal with it.”

Concerns With ‘Leakage’

Carol Buckmann, a co-founding partner at Cohen & Buckmann, said any changes to 401(k) early withdrawal penalty exceptions would raise questions for employers sponsoring plans.

Employers could be given the choice of whether they wanted to include the exception for down payments in their plans, she said. That was the case for some of the new distribution opportunities added under SECURE 2.0 such as for emergency expenses up to $1,000.

She said a plan sponsor’s interest in the exception could depend on the size and demographics of the workforce, as younger employees may be more likely to need help to purchase their first home.

“And some of them will feel that they don’t want to encourage leakage if it’s long-term,” Buckmann said.

The White House’s pending proposal shows the push-and-pull between the desire to encourage home ownership, and the risks of making it more difficult to save enough money for retirement.

Jeff Hahn, a former DOL litigator and current partner at Stris & Maher, said he expects Trump’s initial proposal to still be broad.

“Big picture, this sounds like an attempt to solve or address the problem of housing affordability by potentially exacerbating a separate problem of retirement security,” he added.