Using Your 401(k) to Fund a Down Payment
What the Trump 401(k) Rule Actually Allows
The rule that lets you withdraw money from your 401(k) for a down payment without the usual 10% early withdrawal penalty is called the Roth IRA conversion loophole or, more formally, the ability to take a substantially equal periodic payment (SEPP) under IRS Rule 72(t). However, what many people call the "Trump 401(k) rule" refers to changes made under the SECURE Act of 2019 and expanded in the SECURE 2.0 Act of 2022, which allow first-time homebuyers to withdraw up to $35,000 from certain retirement accounts without the 10% early withdrawal penalty.
The key difference: you can withdraw money early, but you still owe income tax on it. The penalty waiver is not the same as a tax waiver. If you withdraw $35,000, you will owe federal income tax on that full amount in the year you withdraw it, which could push you into a higher tax bracket and increase your tax bill significantly.
Key Takeaways
- First-time homebuyers can withdraw up to $35,000 from a 401(k) or similar workplace retirement plan without paying the 10% early withdrawal penalty, but you still owe income tax on the full amount withdrawn.
- You must have opened the account at least 30 days before withdrawal, and you cannot have taken another first-time homebuyer withdrawal in the past three years.
- Not all 401(k) plans allow this withdrawal option — you must check with your plan administrator to see if your specific plan permits it.
- The money comes out of your retirement savings permanently, reducing the balance that will grow for your later years and lowering your eventual retirement income.
- Income tax on the withdrawal is owed in the year you take the money, which can significantly increase your tax liability and may affect other tax credits or deductions you claim.
Who Counts as a First-Time Homebuyer Under This Rule
"First-time homebuyer" has a specific definition for retirement account withdrawals. You may have access to if you have not owned a primary residence in the past three years. This means you could have owned a home before — you just cannot have owned one recently. If you are married and filing jointly, both spouses must meet this requirement, though only one spouse needs to be a first-time buyer if you are filing separately.
The money must be used to buy, build, or rebuild a primary residence. It cannot be used for a vacation home, investment property, or rental unit. You have 120 days from withdrawal to complete the purchase, though some plans may have different rules, so confirm with your plan administrator.
How Much You Can Withdraw and What It Costs You in Taxes
The maximum withdrawal is $35,000 per person, per lifetime. If you are married, both spouses can each withdraw $35,000, for a combined $70,000. However, this is a lifetime limit — once you use it, you cannot use it again, even if you sell the home and buy another one later.
The tax cost depends on your income and tax bracket. If you withdraw $35,000 and you normally pay 22% federal income tax, you will owe approximately $7,700 in federal tax alone. You may also owe state income tax, depending on where you live. Some states tax retirement withdrawals; others do not. You should run the numbers with a tax professional before withdrawing, because the tax bill can be substantial enough to affect whether the withdrawal makes sense for your situation.
The withdrawal also counts as income for the year you take it, which can affect other tax benefits. For example, it might reduce the amount of the Earned Income Tax Credit (EITC) you can claim, or it might push you into a higher tax bracket and increase your Medicare premiums if you are near retirement age.
Which Retirement Accounts Allow This Withdrawal
Not every retirement account allows first-time homebuyer withdrawals. Workplace 401(k) plans, 403(b) plans (used by nonprofits and schools), and governmental 457(b) plans can offer this option, but only if the plan document includes it. Your employer is not required to allow it, so you must ask your plan administrator or check your plan documents.
Traditional IRAs and Roth IRAs have always allowed first-time homebuyer withdrawals of up to $10,000 (a separate, older rule). The newer $35,000 rule applies only to workplace plans. If you have both a workplace plan and an IRA, you could potentially withdraw from both, but the $10,000 IRA limit and the $35,000 workplace plan limit are separate.
If your plan does not allow this withdrawal, you cannot force it to. You would need to explore other options, such as borrowing against your 401(k) (if your plan allows loans) or withdrawing from an IRA instead.
The Steps to Take a First-Time Homebuyer Withdrawal
First, contact your 401(k) plan administrator — usually the human resources department at your employer or the company that manages your plan. Ask whether your specific plan allows first-time homebuyer withdrawals under the SECURE 2.0 Act. Get the answer in writing if possible, because you will need documentation if the IRS ever questions the withdrawal.
Second, gather proof that you meet the first-time homebuyer definition. You will need to certify that you have not owned a primary residence in the past three years. The plan may ask for a signed statement from you; some plans require nothing more.
Third, request the withdrawal. The plan will give you a form to complete. You will specify the amount (up to $35,000) and the reason (first-time homebuyer). The plan will process the withdrawal, withhold federal income tax (usually 20% unless you request otherwise), and send you a check or direct deposit.
Fourth, report the withdrawal on your tax return. You will receive a Form 1099-R showing the withdrawal amount and the tax withheld. When you file your taxes, you will report this as income. If the tax withheld was less than what you actually owe, you will pay the difference when you file. If it was more, you will get a refund.
What Happens to Your Retirement Savings
The $35,000 you withdraw is gone from your retirement account permanently. It does not grow, and you cannot put it back. If you are 35 years old and withdraw $35,000, that money would have had 30 years to grow at an average annual return of, say, 7%. That $35,000 could have become roughly $300,000 by age 65. By withdrawing it now, you are trading future retirement income for a down payment today.
This trade-off may or may not make sense for your situation. If you cannot buy a home without this money, and you are confident you will save enough for retirement through other means, it might be worth it. If you are already behind on retirement savings, withdrawing early could create a serious shortfall later. A financial planner can help you model the long-term cost.
Alternatives to Withdrawing From Your 401(k)
Before you withdraw, consider other options. Some employers offer 401(k) loans, which let you borrow against your balance and repay it with interest. The interest goes back into your account, not to a bank, and you avoid the tax hit. However, if you leave your job, the loan usually becomes due immediately, or it is treated as a withdrawal and taxed.
Down payment assistance programs run by your city, county, or state may offer grants or low-interest loans specifically for down payments. These do not require you to touch retirement savings. The Housing Finance Agency in your state can point you toward programs that may be open in your area.
Some first-time homebuyer programs allow you to borrow the down payment from a family member with a formal promissory note, which lenders will accept as a gift or loan depending on the program. This keeps the money in your family and does not trigger taxes or penalties.
Saving longer and waiting to buy, or looking at less expensive homes in your area, are also options. The cost of withdrawing early from retirement savings is often higher than it appears at first glance.
Frequently Asked Questions
Can I withdraw from my 401(k) for a down payment if my plan does not offer this option?
No. If your plan does not include the first-time homebuyer withdrawal provision in its documents, you cannot take this withdrawal. You could withdraw the money anyway, but you would owe the 10% early withdrawal penalty plus income tax. Your only other option through that 401(k) would be to take a loan against it, if your plan allows loans.
Do I have to use the money within a certain time after I withdraw it?
Yes. You have 120 days from the date you receive the withdrawal to use the money for a home purchase. If you do not use it within that window, the IRS may treat it as a regular early withdrawal and assess the 10% penalty retroactively, plus you will still owe income tax on it.
What if I am married and my spouse has a 401(k) but I do not?
Your spouse can withdraw up to $35,000 from their 401(k) if they meet the first-time homebuyer definition. You cannot withdraw from their account, but you can use the money they withdraw for the down payment on a home you both own. Each person can only withdraw from their own retirement account.
Will this withdrawal affect my ability to get a mortgage?
The withdrawal itself does not disqualify you from a mortgage. However, the lender will see the large deposit in your bank account and may ask where it came from. You will need to show the 1099-R or a letter from your plan administrator proving it came from your 401(k). Some lenders may also factor the reduced retirement savings into their assessment of your overall financial stability, though this is less common.
Can I put the money back into my 401(k) if I change my mind about buying?
No. Once you withdraw the money, it is out. You cannot reverse the withdrawal or redeposit it into the same 401(k). If you do not use it for a home purchase within 120 days, you will owe the 10% penalty plus income tax on the full amount.