Many Americans struggle to save enough for a down payment, and the idea of tapping retirement savings can be tempting. This possibility drew national attention after President Donald Trump’s administration floated — and then quickly retreated from — a proposal to allow penalty-free 401(k) withdrawals to help Americans buy homes.
In mid-January, Kevin Hassett, director of the National Economic Council, told Fox Business that the administration was preparing a plan to let buyers pull from their 401(k) plans for down payments. But just days later, Trump said he was “not a huge fan” of the idea, arguing that 401(k) plans were performing too well to risk early withdrawals, CNBC reported.
With the policy now uncertain, the bigger question remains: Even if you could use your 401(k) for a home, should you? Here’s why experts say the risks are often greater than the rewards.
Why Using 401(k) Money for a Home Can Hurt Your Retirement Outlook
Retirement accounts exist for one purpose: ensuring you have money later in life. Pulling from them early undermines that goal, said Pam Krueger, consumer advocate and founder of Wealthramp.
“Retirement accounts were created to help people not outlive their money,” Krueger said. “When we start using them for other goals, even good ones like buying a home, there’s a real trade-off — and it often gets glossed over.”
The biggest issue is “retirement leakage,” she explained.
“Money taken out early often doesn’t get put back,” Krueger said. “And that’s often because life gets in the way. Job changes, expenses, family needs — rebuilding that balance just doesn’t happen as often as people expect.”
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Pulling 401(k) Funds Reduces Long-Term Growth
Beyond the structural risks, the math itself can be startling.
Krueger offered this example: If someone withdraws $50,000 for a down payment instead of leaving it invested in a 401(k), if we assume that money would have earned an average return of 7%, it would have grown to roughly $380,000 over 30 years.
“So, the real question isn’t, ‘Can I access the money?’ It’s, ‘Is saving $50,000 today worth giving up nearly $380,000 later?'” she said.
In a market environment where 401(k) plans have seen strong returns, giving up compounding becomes a big trade-off.
There’s a Risk of Becoming House-Rich but Cash-Poor
Homeownership can feel like a smart financial move, but it shouldn’t come at the expense of liquidity.
“We’ve seen plenty of people become house-rich and cash-poor — owning a home but lacking liquidity for emergencies, health issues or job disruptions,” Krueger said. “Retirement savings are often the last line of defense later in life, and once they’re gone, there’s no easy way to replace them.”
If you must withdraw retirement money to afford a home, it’s a strong indicator that the home may realistically be outside your budget.
Housing Market Swings Can Put Your Savings at Risk
The Trump administration’s earlier argument was that redirecting 401(k) funds into home equity could still help Americans grow wealth over time. But homes don’t offer guaranteed growth — and they can lose value.
“There’s risk tied to the housing market,” said Todd Luong, associate with RE/MAX DFW Associates V. “If home prices fall, buyers could lose money in both their homes and their retirement accounts at the same time. Once that money is moved into a house, it’s also less accessible if an emergency comes up.”
When Using 401(k) Funds for a Down Payment Makes Sense
Not all experts believe that using retirement savings for a down payment is always a poor decision. Mary Clements Evans, CFP and behavioral finance specialist, said there are scenarios where it may be justified:
- You have “over-saved” in your 401(k) and are exceeding your retirement targets.
- Local rents are skyrocketing, and owning would lock in more stable housing costs.
- A larger down payment meaningfully lowers your interest rate, reducing long-term borrowing costs.
If you decide to use 401(k) money, Clements Evans stressed the importance of making up the withdrawal over time to avoid jeopardizing retirement security.
“If you withdraw, you have to have the discipline to make up the shortfall,” she said. “I recommend that each year you get a raise, spend half of it and increase your 401(k) [contribution] with the other half. This way, you get to enjoy the fruits of your hard work and protect your financial future.”
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This article originally appeared on GOBankingRates.com: Trump Reverses Course on Using 401(k) Plans for Down Payments — Is It Ever Smart?
