The problem with pulling from your 401(k) to buy a house

The Trump administration has been considering a proposal that would allow you to use retirement funds to buy a new home. 

The move is part of a suite of policies that the Trump administration has floated with the aim of making housing more affordable. More than 75% of U.S. homes are out of reach for the typical American, and the typical household would need to make at least $33,000 more a year to afford a median-priced house, according to Bankrate. The U.S. is also short 4.7 million homes, according to an estimate from Zillow last summer. 

In an interview with Fox Business, Kevin Hassett, director of the White House National Economic Council, said that the Trump administration would allow homebuyers to withdraw money from their 401(k) retirement plan for a downpayment. If you are under 59 ½ years old, withdrawing from your 401(k) generally incurs a 10% penalty.

While Hassett said that President Donald Trump would share more details in his trip to Davos, Trump did not bring up the proposal. And on Thursday, Trump told reporters aboard Air Force One that he is “not a huge fan” of the idea. 

"One of the reasons I don't like it is that their 401(k)s are doing so well," Trump said. 

Experts are skeptical for other reasons. Allowing people to tap into their retirement funds would not help make homes more affordable or accessible, and this policy would end up hurting lower-income and first-time homebuyers, they told Marketplace. 

Only a portion of the population would be able to take advantage of any withdrawals in the first place, said Cliff Robb, a finance professor at Belmont University. Forty percent of Americans do not have investments in a retirement fund, according to a Gallup poll from last year. 

This proposal is unlikely to help younger Americans who are first-time homebuyers because they likely don’t have enough contributions in their 401(k) plan, Robb said. 

“And if they're pulling out their entire retirement savings, that defeats the purpose of the compounding interest over time,” Robb said.

For example, a $10,000 contribution to your 401(k) will grow to more than $76,000 over 30 years, assuming a 7% annual return. 

“To me, it's kind of like we're shifting money around in a way that's not efficient,” Robb said. 

The reason there’s a 10% penalty is because there “will be a natural temptation to borrow from your future self,” Robb said. 

Because lower-income households don’t have much money saved up, allowing them to withdraw money from their accounts is going to widen the wealth gap between these households and higher-income ones 30-50 years down the line, said Danielle Zanzalari, an assistant professor of economics at Seton Hall University. 

Instead of solving a housing problem, this proposal is going to create a retirement problem, Zanzalari said. 

“People will pull from their accounts and they're not likely to replenish it,” Zanzalari said. 

And if people are pulling from their 401(k)s, that means more money is chasing after the same amount of houses, Zanzalari said. 

“So guess what's going to happen? Housing prices are going to go up. We're going to have more bids,” Zanzalari said. “It doesn't actually fix the problem.”

So what would actually help alleviate the housing shortage crisis? Experts have put forth a variety of methods that could tackle the issue, which include legalizing a greater variety of housing (like apartments and duplexes), suspending taxes on investors selling to first-time homebuyers and turning unused office space into housing.