Could Using 401(k)s as Down Payments Make Saving for Retirement Even Harder?

As the federal government looks to make housing more affordable, a Trump administration official this month floated making it easier for homebuyers to fund down payments from their retirement accounts.

But is that a good idea?

Kevin Hassett, director of the National Economic Council, told Fox Business on Jan. 16 the administration was considering a policy that would allow Americans to withdraw money from their 401(k)s to put toward a down payment on a home. He said the president would roll out the full details of the plan at Davos. Instead, on the way home from the World Economic Forum, President Donal Trump said he wasn’t a “huge fan” of the proposal.

“One of the reasons I don’t like it is because 401(k)s are doing so well,” Trump said on Air Force One Thursday.

For many retirement investors, the past few years have been a boon for their portfolios. In 2025, the S&P 500 gained almost 18% and has returned more than 90% since October 2022.

The housing market, in contrast, has offered more modest returns: the S&P Cotality Case-Shiller U.S. National Home Price Index was up 1.4% year-over-year as of October 2025, with a handful of cities posting larger gains.

With mortgage rates still above 6% and some homeowners holding onto their houses because of the low rates they locked in during the COVID-19 pandemic, it may be a tough housing market to break into.

What Would Hassett’s Proposal Entail?

American workers can tap their 401(k)s before they reach age 59 1/2, but the amount taken out is typically subject to income taxes plus a 10% penalty. Hassett’s proposed measure would likely allow people to withdraw their 401(k) funds for a down payment before age 59 1/2 without incurring the 10% early withdrawal penalty.

People also currently have the option of taking out a 401(k) loan, but these typically must be repaid within five years. Additionally, not all plan sponsors offer 401(k) loans, and you can generally only borrow up to 50% of your balance or $50,000, whichever is less.

Financial experts typically advise against withdrawing money from a 401(k) early because workers may miss out on compounded returns over years or decades, reducing their retirement savings in the long run.

“The purpose of the 10% early distribution penalty is to discourage individuals from tapping into retirement savings prematurely,” said Brian Schmehil, managing director of wealth management at the Mather Group. “A 401(k) or IRA should generally be viewed as a long-term vehicle for retirement, not as a short-term savings account.”

Schmehil pointed out that there are better options than tapping your 401(k) for a down payment.

For example, if you’re eligible for a Roth IRA, you can withdraw your initial contributions without taxes or penalties. Plus, you can use $10,000 worth of investment earnings from a Roth IRA for a first-time home purchase without paying the 10% penalty.

“Compared to a 401(k), a Roth IRA typically offers greater flexibility, lower administrative costs, and the added benefit of tax-free growth,” said Schmehil.

How Does 401(k) Borrowing Impact Retirement Savings?

If someone were to dip into their 401(k) for a down payment, it could cost them thousands of dollars in retirement savings, depending on how much they withdraw and when.

In December 2025, the median home sale price was $428,575, according to Redfin data. If you made a down payment of 20%, about $85,700, and pulled that from your 401(k), you’d miss out on decades of compounding.

Assuming an 8% annual stock return, that sum would grow to about $862,000 over 30 years. Home equity, by contrast, typically appreciates at 3% to 4% annually, leaving you with $235,000 to $277,000. The difference is about $600,000 in lost retirement wealth.