What is the American Dream Downpayment Act / 529(b) Plan?

Congress introduced a new bill that gives tax breaks to home buyers in the same way it helps people save for college and for retirement.

This article breaks down the proposed home buyer program, The American Dream Downpayment Act. It explains how the program works, how to use it, and how first-time buyers can take advantage of the tax breaks available to them.

529(b) Savings Plans - The American Dream Downpayment Act

What is the Status of the Program?

As of April 25, 2024, the American Dream Downpayment Act is a bill, and it’s still in discussion in Congress. 

The bill’s timeline is:

• 02/25/21 – H.R. 1360 introduced in the House of Representatives as the American Dream Downpayment Act
• 08/02/22 – S.B. 4722 introduced in the U.S. Senate as the American Dream Downpayment Act

Homebuyer.com maintains a page that shows status for all first-time home buyer government programs with Congress.

What is the American Dream Downpayment Act?

The American Dream Downpayment Act creates tax-advantaged savings accounts for making a down payment and buying a home. 

The program, is officially known as Senate Bill 4722. It’s based on the 529 plan, a tax-exempt tuition savings account.

The American Dream Downpayment Act is available to all home buyers in all 50 states.

What is the 529(b) Savings Plan?

529(b) is the shorthand name for the American Dream Downpayment savings program.

The American Dream Downpayment Act is so named because it’s described in Section 529 of the Internal Tax Code, paragraph (b). Paragraph (a) is where qualified tuition accounts, commonly called 529 plans, are described.

In the same way that “529” has come to represent saving for higher education, 529(b) will come to represent homeownership and buying a home.

How does the 529(b) Savings Plan work?

Money put into a 529(b) down payment savings account grows and can be withdrawn with no taxes due on gains.

Withdrawals from a 529(b) are allowed at any time so long as proceeds are applied to purchasing a home. Monies can be used for a down payment, mortgage and real estate closing costs, state and local taxes, or any other home-buying expenses paid at closing.

529(b) plans are administered on the state-level. Some states may offer additional tax deductions for dollars saved, similar to a tuition savings account. 

Contributions must be cash

Contributions to a 529(b) plan must be made as cash. Stocks and other instruments are not allowed. For example, an account holder can sell stock and put the proceeds into a 529(b), but cannot put the stock into your 529(b). 

Contributions are limited

The 529(b) limits how much cash can be kept in a down payment savings account. The proposed limit is $129,400 which is twenty percent of the base conforming mortgage loan limit. Contributions beyond the program limits are subject to taxation.

Contribution limits adjust with inflation

529(b) contribution limits adjust annually based on the Consumer Price Index. As CPI increases, so do 529(b) contribution limits. There is no provision for a reduction in contribution limits based on CPI. 

Who is Eligible for a 529(b) Savings Plan?

Any U.S. consumer eligible to open a savings account is eligible to start a 529(b).

Down payment savings accounts aren’t limited to first-time home buyers. Anyone can open a 529(b) savings account and designate any person as a beneficiary. 529(b) plans can be opened for personal use or for making cash gifts of down payment.

FAQ About the American Dream Downpayment Act

How do I open a 529(b) Savings Plan?

When the American Dream Downpayment Act is passed into law, down payment savings accounts will be available at most online and retail banks.  

Can I use the 529(b) money for other housing costs?

The American Dream Downpayment Act specifies that tax-exempted cash may only be used to purchase a home, which includes a down payment, closing costs, and other items paid at settlement.

Money may not be used for non-housing-related expenses such as home repairs or mortgage payments.

Can I withdraw money from my 529(b) for reasons other than buying a home?  

Yes, 529(b) account holders can withdraw money anytime. Money withdrawn for reasons other than buying a home is subject to taxation.

Is this different than the Downpayment Toward Equity Act?

Yes, the Downpayment Toward Equity Act of 2021 is a $25,000 cash grant for a down payment on a home, closing costs on a mortgage, interest rate reductions via discount points, and other home purchase expenses.