Could Your 401(k) Help You Buy a Home? What Bozeman Buyers Need to Know

The dream of homeownership in Bozeman has become increasingly challenging. With median home prices still hovering near $700k, many prospective buyers find themselves wanting to invest in a home but facing significant financial barriers to entry. 

A potential policy shift from Washington could change the equation for local homebuyers.

The Proposed Policy Change

President Trump is reportedly drafting an executive order that would allow Americans to withdraw funds from retirement and college savings accounts to purchase homes without facing the usual early-withdrawal penalties. According to reports, the plan could apply to 401(k) plans, IRAs, and potentially even 529 college savings accounts.

This represents a significant departure from current rules, which impose a 10% penalty on most withdrawals from 401(k) accounts before age 59½, in addition to regular income taxes.

What This Could Mean for Bozeman Buyers

For many in the Gallatin Valley, this policy could be a game-changer. Bozeman's housing market has seen remarkable growth over the past several years, with prices that have outpaced wage growth. The down payment hurdle has become one of the biggest obstacles for first-time buyers trying to enter our market.

But First: You Don't Need 20% Down

Before we dive into the retirement account option, it's important to clarify a common misconception: you do not need 20% down to purchase a home in Bozeman.

Many prospective buyers delay homeownership thinking they need to save up six figures for a down payment, but there are several conventional financing options available:

• Conventional loans: Can require as little as 3-5% down for qualified buyers
• FHA loans: Available with just 3.5% down payment
• VA loans: For eligible veterans and service members, 0% down payment options exist

• USDA loans: For properties in eligible rural areas, 0% down is possible

   

On a $500,000 home in Bozeman, a 5% down payment would be $25,000, significantly more attainable than the $100,000 needed for 20% down. Yes, you'll pay private mortgage insurance (PMI) with less than 20% down, but that cost is often outweighed by the benefits of getting into the market sooner and building equity.

The trade-off is real: lower down payment means higher monthly payments and PMI costs, but it also means you can start building equity in Bozeman's appreciating market sooner rather than waiting years to save a larger down payment while paying rent.

When Tapping Your Savings Accounts Might Make Sense

Under current law, there's already a limited exception that allows first-time homebuyers to withdraw up to $10,000 penalty-free from an IRA for a home purchase (though income taxes still apply). This proposed expansion would go much further, potentially opening up significantly larger pools of money that Bozeman residents have been saving for retirement.

So when might tapping retirement or other accounts make sense, given that lower down payment options already exist?

• Avoiding PMI: Reaching that 20% down payment threshold eliminates private mortgage insurance, reducing monthly costs
• Lower monthly payments: A bigger down payment means a smaller loan and lower monthly mortgage payments

• Better interest rates: Some lenders offer better rates for larger down payments

   

For Bozeman buyers who have been building retirement savings but haven't accumulated enough in regular savings for their preferred down payment amount, this policy could provide additional flexibility. However, it's worth carefully weighing whether the benefits of a larger down payment outweigh the cost of removing money from tax-advantaged retirement accounts.

The Broader Housing Initiative

The retirement account access is just one piece of a larger housing affordability push from the White House. President Trump has also vowed to ban large institutional investors—including private equity firms—from purchasing additional single-family homes.

This element could have particular relevance for Bozeman's market. As our community has grown and attracted national attention, we've seen increased interest from out-of-state investors and institutional buyers. The concern among many local residents is that when deep-pocketed investors compete for limited inventory, it drives prices even higher and makes it harder for families to compete.

Republican Senator Josh Hawley has been vocal in his support, arguing that Wall Street has been using retirement funds to buy single-family homes while preventing individual Americans from accessing their own money for the same purpose.

The Trade-offs Worth Considering

While the policy could help Bozeman buyers overcome the down payment barrier, financial experts are raising important concerns about long-term retirement security.

Money withdrawn from a 401(k) or IRA for a home purchase is money that's no longer growing tax-deferred for retirement. In a place like Bozeman, where the cost of living continues to rise, ensuring adequate retirement savings is crucial. The compounding growth lost over decades could significantly impact retirement readiness.

On the flip side, homeownership itself is a wealth-building tool. A paid-off home in Bozeman can reduce retirement housing costs, provide stability, and historically has served as a strong hedge against inflation. For many families, owning a home in our community isn't just about having a place to live, it's about establishing roots and building generational wealth.

What Happens Next?

It's important to note that while an executive order could waive the penalties on early withdrawals, any broader changes to the tax treatment of these withdrawals would require congressional action. The Internal Revenue Code specifically defines when early-withdrawal penalties can be waived, and expanding those exceptions would need legislative approval.

The White House has acknowledged the idea is under review but hasn't confirmed specific details. A spokesperson noted that the administration is "constantly exploring new policy actions" to address affordability challenges.

What This Means for Our Local Market

If implemented, this policy could inject additional buying power into Bozeman’s real estate market. That could mean:

• More competition for existing inventory: With more buyers able to access down payment funds, demand for homes could increase.
• Potential upward pressure on prices: More available capital chasing limited homes could push prices higher, at least in the short term.
• Opportunities for first-time buyers: Local renters who've been building retirement savings might finally have a path to homeownership.

• Shift in buyer demographics: We might see more younger buyers entering the market earlier than they otherwise would have.

   

The Bottom Line for Bozeman Residents

For prospective homebuyers in the Gallatin Valley, this potential policy represents both opportunity and risk. The ability to tap retirement savings could open doors that have been closed, particularly for those who have good incomes but haven't been able to save enough for down payments while also paying Bozeman's rising rents.

However, the decision to use retirement funds for a home purchase, even without penalties, should be made carefully and ideally with guidance from a financial advisor who understands both the local real estate market and your long-term financial picture.

As Bozeman continues to grow and evolve, policies that affect housing affordability will have real impacts on who can afford to call our community home. Whether this proposal becomes reality and how it ultimately affects our local market remains to be seen, but it's certainly worth keeping an eye on.

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This article is based on reporting about a potential executive order that has not yet been officially announced. Details may change as the policy develops. Readers should consult with financial and tax professionals before making decisions about retirement account withdrawals.