Trump Administration Floats 401(k) Withdrawals for Down Payment on a Home

The Trump administration will announce a plan next week to permit Americans to draw from their 401(k) plans for a down payment on a home.

White House National Economic Council Director Kevin Hassett told Fox Business on Friday morning that President Donald Trump would put out the plan in Davos next week.

"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 on the home and put it in as an asset in your 401(k), then your 401(k) would grow over time as the value of your house grows," Hassett told Fox Business.

"It would be more money for retirement, and you'll have solved the liquidity constraint problem and gotten yourself a house earlier in life," he said.

The idea comes as both average down payments and monthly payments for a home have almost doubled in recent years amid high interest rates and inflation, Hassett said.

Realtor.com® economist Jake Krimmel says such an idea could be a "high-impact policy," but there are risks of unintended consequences, given the substantial amount of money in 401(k) plans amid the market's growth in recent years.

"There's the potential here for substantial 'down payment self-assistance.' But what effect would this have on the housing market? This is a demand-side attempt to solve the affordability crisis," Krimmel says.

"At first blush, it might seem great to free up these previously illiquid assets for a down payment, home prices will also go up in response. If the government gave everyone a $20,000 check that could only be used on down payments, house prices would go up by a similar amount. So the net effect on overall market affordability would probably be quite small. In the supply-constrained Northeast and Midwest, such a reform could make the affordability issue even worse."

Krimmel adds that withdrawing funds from 401(k) plans could be a risky move, explaining that "401(k)s are valuable because they are tax-advantaged, harness the power of compound interest, and allow consumers to diversify their portfolio."

This follows several other moves from the Trump administration aimed at improving housing affordability, following an effort to get Fannie Mae and Freddie Mac to buy up to $200 billion in mortgage-backed securities, while also aiming to discourage large institutional investors from buying up homes in the market.

Democrats, in the meantime, proposed several ideas of their own this week aimed at spurring housing production and improving affordability. A bipartisan housing reform bill stalled in the House late last year.

While there isn't a law currently allowing for 401(k) distributions for buying a home, IRAs have a carve-out for their 10% distribution tax to allow up to $10,000 to be taken out for a qualified first-time home purchase.