New Bill Could Let First-Time Buyers Use 529 Savings for a Home

A new bipartisan proposal in Congress could give some first-time homebuyers another way to cover one of the biggest obstacles to purchasing a home: the down payment.

The First-Time Homebuyer Empowerment Act would allow eligible buyers to use up to $35,000 from a 529 education savings account toward the purchase of their first home.

If approved, the measure would give families more flexibility with unused education savings while potentially helping more buyers enter the housing market.

How the Proposal Would Work

529 plans are tax-advantaged accounts traditionally used to pay for qualified education expenses such as tuition, fees, books, and certain other school-related costs.

Under current rules, withdrawing money for nonqualified purposes can trigger taxes and penalties on the earnings portion of the withdrawal.

The proposed legislation would create a new option for first-time homebuyers by allowing up to $35,000 in unused 529 funds to be applied toward a down payment without the usual penalty associated with noneducation withdrawals.

The idea is designed to help households that saved for college but later found themselves with money remaining in the account.

Why Down Payments Remain a Major Barrier

For many prospective buyers, the monthly mortgage payment is only part of the challenge.

Saving enough money for a down payment, closing costs, moving expenses, and emergency reserves can take years, particularly as home prices and everyday living costs remain elevated.

Supporters of the legislation argue that allowing buyers to use money they have already saved could provide another path into homeownership without creating a new government-funded assistance program.

The proposal could be especially useful for families with substantial balances left in 529 accounts after education expenses have been paid.

Housing Affordability Continues to Drive New Proposals

The bill is part of a broader effort in Washington to address housing affordability.

Lawmakers from both parties have introduced proposals aimed at increasing housing supply, reducing construction barriers, improving tax incentives, and helping first-time buyers save for a home.

Other ideas considered in recent years have included changes to capital gains tax rules, specialized first-time homebuyer savings accounts, and proposals involving retirement savings.

The new 529 proposal takes a different approach by expanding how an existing savings vehicle can be used.

Some States Already Offer Homebuyer Savings Programs

A number of states have also experimented with tax-advantaged savings programs specifically designed for first-time homebuyers.

These programs can allow residents to set aside money for a future home purchase while receiving certain state tax benefits.

The federal proposal would differ because 529 plans already exist nationwide and are commonly used by families saving for education.

Allowing those accounts to serve an additional purpose could give savers more flexibility if their education plans change or they do not use the entire balance.

What Buyers Should Know

The proposal is still legislation, which means the rules would not change unless the bill successfully moves through Congress and becomes law.

For now, buyers with 529 accounts should continue following existing withdrawal rules.

If the measure is eventually approved, prospective buyers would also want to review the final eligibility requirements, tax treatment, and definition of a qualifying first-time homebuyer before making a withdrawal.

The Bottom Line

A new bipartisan bill could allow first-time homebuyers to use up to $35,000 from unused 529 education savings toward a down payment.

The proposal reflects growing interest in finding new ways to help buyers overcome upfront homeownership costs without requiring them to start an entirely separate savings plan.

While the bill still has to make its way through Congress, it could eventually give some households another financial tool when they are ready to purchase their first home.