Trump wants to let you take money from your 401(k) to buy a house. Putting it back is complicated.

By Beth Pinsker

If you can avoid the 10% penalty, does that make it a good deal?

If homeownership comes at the expense of retirement security, is it helping affordability?

The Trump administration has a plan to make it easier to take money out of your retirement savings to buy a home. But should you?

The Trump proposal, planned for release next week at the World Economic Forum in Davos, Switzerland, would allow workers to take money out of their 401(k) plans for the purchase of a house - paying income tax, but not the 10% early-withdrawal penalty. Currently, you can only make use of that exception for early withdrawals from traditional IRA accounts, or you can take Roth IRA contributions out at any time without taxes or penalties.

Any change to 401(k) rules would require congressional action, since workplace plans are regulated by the IRS and subject to ERISA laws. Congress has regularly made it easier to take money out of these plans without penalty, the most recent being loosening the hardship-withdrawal rules.

A second part of the plan, previewed by White House economic adviser Kevin Hassett on Fox News, is some way for people to be able to put that down-payment money back into their accounts as equity in the property they buy. There's no mechanism in today's system for anything like this. The closest would be a self-directed IRA that invests in real estate, but that is now only specifically for investment properties, not a personal residence.

The 401(k) system is not designed for people to hold personal assets - not real estate, crypto or even spare cash. Contributions are regulated and typically come through payroll deductions. You invest your money in a slate of offerings approved by a fiduciary committee of your employer.

The only way now to sidestep this is if your company allows you to invest in a self-directed brokerage account - but still, you typically use the incoming cash from your contributions to buy holdings available from the account custodian, not bring your own.

Historically, even the adventurous people who take the extra steps to open a brokerage window aren't all that adventurous with their investments, with cash and widely held index ETFs being the most common holdings.

"From what I see so far, none of these things would be allowable," said Craig Copeland, director of wealth-benefits research with the Employee Benefit Research Institute (EBRI). "I don't understand how they are going to do it. There's no way to allow people to put money back in. You can't contribute any more than the allowable amount in any one year."

Copeland also points out that what's eventually permissible in 401(k) plans from a legislative standpoint is never required of plan sponsors. So even if the rules change, that does not mean individual companies will adopt any of the changes.

Risk of taking out money

Taking money from retirement accounts to buy a home or pay for other large life expenses isn't new. I took money out of my IRA for the down payment on my first home. I also took a 401(k) loan to pay for my divorce lawyer. I have lived to tell the tale.

So have many others who have taken money out of retirement accounts to cover emergency medical expenses, higher-education costs or any of the other exceptions to the 10% penalty on withdrawals before age 591/2. People cash out some portion of their 401(k)s all the time; a new Transamerica Center for Retirement Studies survey found that 37% had taken a loan, early withdrawal or hardship withdrawal from retirement funds at some point and called this "concerning."

Why? Because taking it out is easy. The hard part is putting the money back in.

Most money that leaves 401(k) accounts through withdrawals before retirement is lost in the wind, which is why the industry refers to this as "leakage." This leads to a loss in retirement savings and creates more of a crisis down the line, since the number of people taking money out of plans increases.

"If it goes to much greater levels, that's a concern. You don't want to see leakage," said David Stinnett, head of Vanguard's strategic retirement-consulting team, which looks at 401(k) loans and withdrawals every year in its How America Saves survey.

Then perhaps they should look to the 401(k) loan system that already exists. Today, for example, you can take out a loan for the lesser of 50% of your account balance or $50,000 and pay it back incrementally from payroll deductions. This is basically a loan from your own money, paying yourself the interest (and fees to the administrator for the use of your own money). You used to have to stop making contributions while you had an active loan, which effectively stalled your retirement savings, but now you can continue saving while you make use of a little bit of the cash you have saved.

What do you lose in this scenario? On a $10,000 loan at a healthy and steady 10% growth rate over the five-year term of the loan, you'd miss out on probably less than $6,000 in growth, because you'd be paying it back as you go.

Some of the math of lost opportunity cost also depends on what you do with the $10,000. If you're using it for the down payment on a house rather than bills, then you're just shifting the money to a different type of investment. That money could still grow in value, although probably not at 10% per year, and wouldn't be as readily available for spending needs later on in life.

This is why people still take out chunks of money from their 401(k) plans for home purchases now, regardless of the 10% penalty - if they don't have access first to Roth IRA contributions, which have no tax or penalty, or to an IRA which allows the first-time home-buyer exception.

If a person is really keen on buying a house, paying a 10% penalty on something like a $10,000 withdrawal is $1,000, on top of the $1,200 to $2,400 or so in taxes. That likely won't discourage them. Saving a $1,000 penalty also won't likely encourage them to buy if they weren't otherwise inclined, or were thwarted by other housing-market dynamics like low supply.

The reason most financial advisers consider a loan like this a better option than a straight withdrawal is that if you take out $10,000 and never put it back, you'd lose out on much more growth. Over 30 years, it's more like $150,000 less in your account than if you had left the money there. You also have to make sure that by taking out the money, you aren't overextending yourself - or you may end up in a precarious financial position.

"This is absolutely a situation of stealing from your future self," said Valerie Rivera, a certified financial planner based in Chicago. "If you're in a position to purchase a home and the only capital you have available is in a retirement plan, then you don't have enough money."

That leaves the impact of this proposal on home affordability and the general affordability crisis in the U.S. up in the air. At the end of the day, each worker only has one set of money, and they need to parcel it out among their needs today for housing, childcare, education, food and everything else, and also put aside what they will need for their futures.

Rivera called the plan to allow 401(k) withdrawals for home purchases a "kick-the-can-down-the-road" strategy. "People put [a] down payment and don't think about anything else," she said. "Then they become cash poor and can't keep up with the [home's] maintenance needs."

Got a question about investing, how it fits into your overall financial plan and what strategies can help you make the most out of your money? You can write to me at beth.pinsker@marketwatch.com. Please put "Fix My Portfolio" in the subject line.

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-Beth Pinsker

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