A new proposal backed by Donald Trump would permit individuals to withdraw funds from their 401(k) accounts to purchase a home, bypassing the standard 10% early withdrawal penalty. However, the plan requires repayment within a strict timeframe, with interest, creating significant financial hurdles.
- Up to $35,000 in 401(k) funds could be withdrawn for a primary home purchase without the 10% early withdrawal penalty
- Repayment must occur within five years at the prime rate (8.5% as of January 2026)
- Total repayment for $35,000 could reach $49,800, including $14,800 in interest
- The proposal applies only to individuals under age 50 and does not allow use for investment properties
- Withdrawals count toward the 2026 annual contribution limit of $22,500
- Estimated federal revenue loss of $18 billion over ten years if implemented
Under a recently outlined policy framework, individuals could access up to $35,000 from their 401(k) accounts to finance a home purchase without incurring the typical 10% early withdrawal penalty. The proposal, part of a broader tax reform initiative, aims to boost homeownership among younger Americans and those with limited savings. The catch lies in the repayment mechanism. Withdrawn funds must be repaid within five years, with interest calculated at the prime rate—currently 8.5%—as of January 2026. For example, a $35,000 withdrawal would require repayment of approximately $49,800 over five years, assuming the full term is used and no prepayments are made. This results in a total interest cost of $14,800, significantly increasing the financial burden. The policy also restricts the use of funds to a primary residence, excludes investment properties, and applies only to individuals under age 50. Even then, the withdrawal would count toward the annual contribution limit of $22,500 (as adjusted for 2026), reducing future tax-advantaged savings capacity. Financial advisors warn that the withdrawal could severely impact long-term retirement planning. A $35,000 withdrawal, if not repaid, results in lost compound growth. At an average annual return of 6%, the account would lose roughly $12,700 in potential value over 30 years. The complexity of repayment, coupled with high interest and the risk of late fees, places substantial responsibility on individual discipline. The proposal remains in draft form and faces scrutiny from congressional budget analysts, who estimate it could cost federal revenue $18 billion over a decade if enacted. It has not yet been introduced as legislation, but its inclusion in Trump’s 2026 economic platform underscores growing debate over retirement account flexibility and long-term financial security.