As 401(k) Down Payment Proposal Sputters, Hecm For Purchase Offers Alternative For Seniors

The Trump administration recently floated the idea that Americans should be able to withdraw funds from their 401(k) retirement accounts without tax penalties to furnish down payments for home purchases.

Details — including limits and eligibility — remain unclear. And the proposal is in limbo, per recent comments from Trump that appear to distance himself from the plan. While speaking to reporters last week after the World Economic Forum in Davos, Trump said he opposes using retirement savings for home down payments and prefers that Americans leave their 401(k)s untouched.

Shannon Hicks, co-founder of Reverse Focus and editor in chief of HECMWorld, said in video published Monday that even though the proposal sounds like an easy and attractive solution, it comes with major drawbacks. While the change could help buyers access the housing market, Hicks warns it could weaken long-term retirement security.

Under current law, early withdrawals face a 10% penalty and income taxes. The proposal would remove the penalty but not the taxes. Withdrawals could push borrowers into higher tax brackets and reduce eligibility for other benefits.

“Depending on the amount withdrawn, this can push borrowers into higher tax brackets,
reduce eligibility for health insurance premium credits, or create unexpected tax liabilities,” Hicks said.

For older home buyers, a Home Equity Conversion Mortgage for Purchase (H4P) is an existing alternative, Hicks said. Available to those 62 and older, it allows buyers to use proceeds from a prior home sale to finance the purchase of a new property with a reverse mortgage.

HECMs for Purchase have been underutilized in the market, according to data from the Federal Housing Administration‘s Single Family Production Report. As of August 2025, traditional HECMs comprised 85.5% of the market, while refinances and HECMs for Purchase comprised respective shares of 8.4% and 6.1%.

Borrowers who use a HECM for Purchase typically make no monthly mortgage payments, although they must maintain the home and pay taxes and insurance, Hicks explained.

“The key difference is cash flow. With a HECM for Purchase, there are no required monthly
mortgage payments, provided the borrower lives in the home as their primary residence and
meets property tax, insurance, and maintenance obligations,” Hicks said.

Reverse mortgage proceeds are not taxable income. But interest accrues over time, reducing future equity and potentially leaving heirs with a smaller inheritance.

Others have criticized the 401(k) proposal. A recent Realtor.com report said the proposal could “undermine long-term financial security,” noting that withdrawing from retirement funds during prime compounding years can be detrimental.