Federal Bill Would Waive Penalties for First-Time Home Buyers Tapping 401(k)s

A bill to waive the tax penalties for withdrawing money from a 401(k)-account early if the money is used for closing costs or down payments for purchasing a home was introduced last week in the House of Representatives.

The Home Savings Act, introduced by Representative John McGuire, R-Virginia, with no co–sponsors, faces an uncertain future after President Donald Trump walked back support for the proposal, insisting he was “not a fan” of the idea, which his advisers had floated as part of his affordability agenda.

As introduced, the Home Savings Act would amend the Internal Revenue Code of 1986 to allow penalty-free withdrawals from 401(k) accounts for down payments or closing costs on a primary residence. While similar qualifying withdrawals are currently allowed with individual retirement accounts, experts previously told PLANADVISER that any effort to make 401(k) withdrawals penalty –free for homebuying would require action from Congress.

The bill would allow individuals to withdraw funds for up to five years without penalty. The proposed legislation would also permit penalty-free 401(k) withdrawals that are gifted to a relative for the same purpose, with these gifts exempt from gift tax, provided the relative uses the funds for a down payment or closing costs on a primary residence.

“For many, owning a home is the American dream but it’s been out of reach for far too long,” said McGuire in a statement. “Too many Americans are becoming lifelong renters. This bill will pave the way for removing financial barriers to home ownership. Family members aiding their relatives with closing costs and down payments aren’t just funding a house, but a home for generations to come. This act is ending a cycle of throwing away money in renting and helping young people invest in their future.”

The U.S. homeownership rate was 65.3% in the third quarter of 2025, similar to the rate in the second quarter of 2025 and U.S. Census Bureau data from 2000.

The bill was referred to the House Ways and Means Committee.