The First-Time Home Buyer Empowerment Act allows individuals to make tax-free distributions of up to $35,000 from long-term 529 education savings accounts to help fund the purchase of a first home.
Jon Husted
Senator
OH
The First-Time Home Buyer Empowerment Act allows individuals to make tax-free withdrawals of up to $35,000 from long-term 529 education savings accounts to fund a first-time home purchase. This provision shares a lifetime $35,000 cap with existing Roth IRA rollover rules, ensuring flexible use of long-standing education savings. To qualify, accounts must be at least 15 years old, and funds must be used for a principal residence within 60 days of distribution.
New 529 Rule Unlocks $35,000 in Tax-Free Savings for Your First Home Purchase
The First-Time Home Buyer Empowerment Act is looking to turn your old college savings into a down payment. This bill proposes an amendment to Section 529(c)(3) of the tax code, allowing you to pull up to $35,000 out of a 529 plan tax-free to buy your first house. It’s a major shift for these accounts, which have traditionally been locked down for tuition and books. If you’ve got money sitting in a plan that you didn't end up using for school, this could be the boost you need to get into the housing market without the IRS taking a cut of the gains.
The 15-Year Waiting Room
Before you start picking out paint colors, there are some specific strings attached. To qualify for this tax break, the 529 account must have been open for at least 15 years by the time you take the money out. Additionally, you can’t just dump cash into the account today and buy a house tomorrow; the bill specifies that you can only withdraw contributions that were made more than five years ago. Think of it like a slow-cooker for your down payment—this is designed for long-term savers, like a young professional whose parents started a plan in 2010, rather than someone looking for a quick tax loophole.
The $35,000 Ceiling and the Roth Connection
The $35,000 limit is a lifetime cap per person, not per account. It’s also important to note that this limit is shared with the existing rule that lets you roll 529 funds into a Roth IRA. If you’ve already moved $10,000 into a Roth IRA from your 529, you’d only have $25,000 left for your home purchase. Once you take the distribution, you have a 60-day window to close on the house. If the deal falls through, the bill gives you a bit of a safety net: you have 120 days to put the money back into a 529 or an ABLE account without getting hit with a penalty.
Staying Put to Keep the Perk
The government wants you to actually live in the house you buy. Under the recapture rules, if you sell the home or stop using it as your primary residence within five years, you’ll have to pay back the tax you saved, plus interest. The amount you owe back drops by 20% for every full year you stay in the house. So, if a software developer buys a condo using these funds but decides to flip it and move two years later, they’ll be on the hook for a significant portion of those original tax savings. It’s a clear signal that this benefit is for long-term residents, not short-term investors.