New Bill Allows $35,000 Tax-Free 529 Withdrawals for First-Time Home Purchases

The First-Time Home Buyer Empowerment Act proposes a major shift in how you can use your college savings. Under this bill, you could take up to $35,000 out of a 529 plan tax-free to put toward your first home. It’s a move that recognizes that for many young professionals, the hurdle isn't just paying for a degree—it's scraping together a down payment in an expensive housing market. To qualify, the account must have been open for at least 15 years, and you can only withdraw contributions that have been sitting in the account for at least five years. This isn't a quick-fix loophole; it’s designed for long-term savers who might have over-funded a college account or decided on a different career path.

The Long-Game Requirement

This bill isn't for someone who opens an account today and wants to buy a house next year. Because of the 15-year maintenance rule (Section 2), this is aimed at people whose parents started saving for them when they were kids, or adults who have been playing the long game with their finances. For example, if you’re 30 and your parents have $40,000 left in a 529 they started when you were in middle school, you could pull $35,000 of that to help cover a down payment on your first condo. However, that $35,000 is a lifetime limit that shares a 'bucket' with the existing rule allowing 529-to-Roth IRA rollovers. If you’ve already moved $10,000 into your Roth IRA from your 529, your available home-buying limit drops to $25,000.

The 'Stay Put' Clause

The bill includes a strict 'recapture tax' to ensure people actually live in the homes they buy. If you sell the house or move out within five years of the purchase, you’ll have to pay back the taxes you originally skipped, plus interest. The bill does offer a bit of grace: for every full year you live there, the amount you owe back drops by 20%. So, if you live in the house for four years and then have to move for a job, you’d only owe back 20% of that original tax benefit. It’s a built-in incentive to make sure these funds are supporting long-term housing stability rather than quick property flips.

Safety Nets for Failed Closings

Real estate deals fall through all the time—inspections fail, or financing hits a snag at the last minute. The bill handles this by giving you a 120-day window to put the money back into a 529 or an ABLE account if the purchase is delayed or canceled. As long as you re-deposit the funds within that timeframe, you won’t get hit with a surprise tax bill or a penalty. This flexibility is key for anyone navigating the current 'offer-rejected' cycle of the modern housing market, ensuring that a lost bid doesn't result in a lost tax advantage.