New Bill Would Let College Savers Use Leftover 529 Money for Down Payment

A bipartisan bill could let people use a common college savings financial tool to pay for their first house.

The First-Time Homebuyer Empowerment Act would let people use up to $35,000 from a 529 college savings account for a down payment on their first home. It’s the latest idea in a line of congressional bills that would let Americans cut their taxes while they save for a home.

Sens. Michael Bennet (D-CO) and Jon Husted (R-Ohio) introduced the bill in the Senate, while Rep. Tracey Mann (R-KS) led a bipartisan group of 11 co-sponsors .

“Too many Ohioans have worked hard, saved responsibly, and still struggle to afford a down payment,” Husted said. “By freeing up existing resources, I’m proud this bipartisan bill gives first-time homebuyers another tool to use in pursuing their version of the American dream.”

A 529 Education Savings Account, also known as a college savings plan, is a tax-advantaged savings account for education expenses. Typically, these plans are tax-deferred, and they allow for tax-free withdrawals if they are used for tuition, fees, and supplies. Americans can use them to set aside hundreds of thousands of dollars for a college or trade school.

Eliminating early withdrawal tax penalties would allow Americans to use leftover 529 funds to buy a home.

“This bill would allow first-time homebuyers to use the savings they already have to cover a down payment and help put homeownership within reach,” Bennet said.

The pitch comes on the heels of Congress passing the bipartisan 21st Century Road to Housing Act, which aimed to make homeownership more affordable. Members found rare common ground as they responded to widespread anxiety that homes are out of reach of many young people.

Tax-free advantage

The high cost of housing has emerged as one of the very few issues on which Democrats and Republicans can find meaningful common ground. It’s also where both parties are trying to convince voters they are creating solutions ahead of the midterms.

While the housing bill was aimed at cutting regulations and red tape that drive up the cost of building new housing, another set of bills also takes aim at ways in which taxes and penalties eat into Americans’ savings and prevent them from using some of their money for buying a home.

The National Association of Realtors® has lobbied for a change to the capital gains tax scheme. That could allow longtime homeowners to sell their homes without paying taxes on their profits.

The Trump administration also briefly considered allowing Americans to pull from 401(k)s for a down payment without incurring the usual penalty. It later stepped back from that idea.

A few states, including Virginia and Colorado, have set up special savings accounts for first-time homebuyers that will allow them to accrue tax benefits while they save for their first home. The college savings account is an already-existing tool for letting Americans avoid tax bills for big investments.

Bill Killmer, senior vice president of legislative and political affairs at the Mortgage Bankers Association, says the proposed bill is “a common-sense solution that empowers first-time buyers to use their own savings—at no cost to taxpayers.

“Down payment hurdles continue to block many families from owning a home,” he adds.

Tristan Navera is a senior reporter on housing policy, covering trends and solutions in the housing market from Washington, DC. He was previously a senior reporter at Bloomberg Law, and before that covered real estate for the Washington Business Journal. Earlier in his career, he spent a decade reporting on business and real estate in Dayton and Columbus, OH. A Cincinnati native, he holds a journalism degree from Ohio University.