First-Time Homebuyers Could Tap $25K from Retirement Penalty-Free Under New Bill, Effective 2026

This proposed legislation aims to give first-time homebuyers a bigger boost by more than doubling the amount they can withdraw penalty-free from certain retirement accounts for a down payment. Specifically, the 'First Time Homeowner Savings Plan Act' amends the tax code (Section 72(t)(8)(B)(i)) to raise the limit from the current $10,000 up to $25,000 per person. Normally, taking money out of retirement accounts early incurs a 10% tax penalty, but this existing exception allows qualifying first-time buyers to avoid that hit on amounts up to the limit. This change would apply to distributions made after December 31, 2025.

What does this mean practically? It could significantly help aspiring homeowners bridge the gap for a down payment or cover closing costs, especially in today's housing market. For someone who's been diligently saving in an IRA or similar retirement plan, this offers more flexibility to access those funds for that crucial first home purchase without the usual penalty sting. To keep pace with rising costs over time, the bill also includes a provision for the $25,000 cap to be adjusted for inflation in taxable years after 2026. While this provides more immediate buying power, it's worth remembering the potential trade-off: using retirement funds now means less money compounding for later years. It essentially allows individuals to prioritize near-term homeownership using funds initially earmarked for the long term.