Trump Responds to 401(k) Proposal for Homebuyers
Last week, President Donald Trump expressed his disapproval of a suggestion from one of his economic advisors, which proposed allowing Americans to dip into their 401(k) savings for home down payments. This idea has also met resistance from several financial advisors.
During a conversation with reporters on Air Force One, Trump remarked, “I’m not a big fan. Some people like it.” He was returning from the World Economic Forum in Davos, Switzerland, where he had hinted at announcing such a plan. Kevin Hassett, the Director of the National Economic Council, mentioned the proposal in a conversation with a news outlet, though the president later clarified his stance. “One of the reasons I don’t like it is that their 401(k)s are doing very well,” he added.
According to Fidelity Investments, the average 401(k) balance increased by 9% year-over-year, reaching an all-time high of $144,400 in the third quarter.
Access to Retirement Plans
Out of 126.9 million private sector workers, about 72% have access to retirement plans at work, as reported by the Bureau of Labor Statistics. Yet, only 53% actually participate in these plans. Despite current options for accessing 401(k) or IRA funds for down payments—sometimes without penalties—experts caution that relying on retirement funds for home purchases may not align with broader financial goals.
Douglas Bonepers, a certified financial planner from New York, noted, “I really think using your retirement savings is an option of last resort.” He suggested that prioritizing housing over retirement savings could be questionable.
Rising Housing Costs
Affordability has become a pressing issue as households grapple with rising prices, which have surged by over 25% since January 2020, according to the consumer price index. Trump seems to be reconsidering the idea of using retirement funds for home purchases. However, his administration is pushing for a ban on large institutional investors buying single-family homes.
Statistics indicate that only 2% of the housing market is affected by such investments, yet they hold considerable influence in certain areas. In early January, Trump stated he would direct Fannie Mae and Freddie Mac to buy $200 billion in mortgage-backed securities to help reduce mortgage rates.
Current Home Prices
Many potential homebuyers are being sidelined by increasing home prices and mortgage rates. The national median sales price for a single-family home hit $409,500 in December, reflecting a mere 0.4% increase from the previous year and a decline from June’s peak of $435,300. The average interest rate for a 30-year mortgage currently sits at 6.17%.
This financial landscape has contributed to a notable decline in first-time buyers, who make up just 21% of home purchases, per a recent report from the National Association of Realtors.
Saving for a Down Payment
Given the high cost of housing, saving for a down payment can be quite challenging. Even if people were more easily able to access retirement funds, their savings might still fall short. Generally, a 20% down payment is ideal to avoid private mortgage insurance. Last year, the median down payment for buyers was reported at 19%, the highest for first-time buyers since 1989.
For example, a $409,500 home would require an $81,900 down payment for 20%, while a 10% down payment would be $40,950.
The average 401(k) balance is currently around $148,153, but younger savers usually have less in their accounts. For individuals aged 25 to 34, the median balance is a modest $16,255. The most common down payment source for first-time buyers remains personal savings, with 59% using their own resources, and about 26% tapping into assets like 401(k)s or IRAs.
Alternative Access Routes
Under current regulations, first-time homebuyers can withdraw up to $10,000 from their IRA for down payments without incurring penalties. Additionally, many 401(k) plans permit loans, allowing individuals to borrow against their contributions. Repaying these loans typically happens through payroll deductions.
However, if an employee leaves their job, the loan may need to be repaid promptly, which could lead to tax implications if they can’t cover it.
Moreover, while 94% of retirement plans allow for hardship withdrawals, this option usually involves taxes and potential penalties. The Government Accountability Office anticipates that a significant percentage of hardship withdrawals will be used to prevent home foreclosure.
While some individuals tap into retirement savings for home purchases, it’s crucial to weigh this strategy within a larger financial plan. Withdrawing from retirement accounts not only reduces current savings but also sacrifices potential future earnings from compounding interest.
Ultimately, the trade-offs are worth considering carefully, as misallocating retirement funds can hinder long-term financial stability.
