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401K loan for down payment?

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Anonymous
Not applicable

Re: 401K loan for down payment?

http://www.irs.gov/retirement/article/0,,id=162416,00.html

 

What is the IRS definition of hardship for a 401(k) plan?

For a distribution from a 401(k) plan to be on account of hardship, it must be made on account of an immediate and heavy financial need of the employee and the amount must be necessary to satisfy the financial need. The need of the employee includes the need of the employee's spouse or dependent. (Reg. §1.401(k)-1(d)(3)(i))

Under the provisions of the Pension Protection Act of 2006, the need of the employee also may include the need of the employee's non-spouse, non-dependent beneficiary.

Whether a need is immediate and heavy depends on the facts and circumstances. Certain expenses are deemed to be immediate and heavy, including: (1) certain medical expenses; (2) costs relating to the purchase of a principal residence; (3) tuition and related educational fees and expenses; (4) payments necessary to prevent eviction from, or foreclosure on, a principal residence; (5) burial or funeral expenses; and (6) certain expenses for the repair of damage to the employee's principal residence. Expenses for the purchase of a boat or television would generally not qualify for a hardship distribution. A financial need may be immediate and heavy even if it was reasonably foreseeable or voluntarily incurred by the employee.
(Reg. §1.401(k)-1(d)(3)(iii))

Message 11 of 18
Donna1966
Regular Contributor

Re: 401K loan for down payment?

Yes, that's true, it can be a "hardship".  The thing I am saying is that you do have the 10% penalty on a 401K hardship for a house  (unless you meet another requirement ie. over 59 1/2) but not on an IRA: (this is from the same page of your link)

 

5.  What are the consequences of taking a hardship distribution of elective contributions from a 401(k) plan?

After an employee receives a hardship distribution of elective contributions from his or her 401(k) plan, generally the employee will be prohibited from making elective contributions and employee contributions to the plan and all other plans maintained by the employer for at least 6 months after receipt of the hardship distribution.
(Reg. §1.401(k)-1(d)(3)(iv)(E)(2))

Hardship distributions are includible in gross income unless they consist of designated Roth contributions. In addition, they may be subject to an additional tax on early distributions of elective contributions. Unlike loans, hardship distributions are not repaid to the plan. Thus, a hardship distribution permanently reduces the employee's account balance under the plan.

A hardship distribution cannot be rolled over into an IRA or another qualified plan.
(Code § 402(c)(4))

Return to List of FAQs

 


 


7.  Are hardship distributions allowed from an IRA?

Not exactly. There is generally no limit on when an IRA owner may take a distribution from his or her IRA, although there may be unfavorable tax consequences, such as an additional tax on early distributions. However, certain distributions from an IRA that are used for expenses similar to those that may be eligible for hardship distributions from a retirement plan are exempt from the additional tax on early distributions. Specifically, a distribution from an IRA for higher education expenses or to finance a first-time home purchase is exempt from the early distribution tax.
(Code § 72(t)(2)(E),(F))

 

 

Message Edited by Donna1966 on 02-27-2009 01:26 PM
Message 12 of 18
twoaklawn
Valued Member

Re: 401K loan for down payment?

It's always best to check with your plan.  Some of them have strange rules.  My 403(b) plan does not allow loans against it, and for hardship withdrawals we are only allowed to withdraw the employee contribution only, even if you are 100% vested including the employer contribution.  It doesn't seem fair since that is technically my money, but those are the rules under the plan.
Message 13 of 18
Donna1966
Regular Contributor

Re: 401K loan for down payment?

Yup, the OP should check with their HR dept for withdrawal/loan options, but remember, whatever option is chosen, federal taxability is always governed by the IRS.
Message 14 of 18
Anonymous
Not applicable

Re: 401K loan for down payment?


@Donna1966 wrote:
Yup, the OP should check with their HR dept for withdrawal/loan options, but remember, whatever option is chosen, federal taxability is always governed by the IRS.

Okay, I'm too tired to read that whole thing. Hehe. But are you saying that you still get taxed the 10% on a hardship loan? Maybe that's where my wires are getting crossed??

 

Nevermind. I went ahead and read what you posted. I see - that's where I was confused. I didn't realize that you get taxes on a hardship loan. Sorry!

Message Edited by UpUpUp on 02-27-2009 03:00 PM
Message 15 of 18
Donna1966
Regular Contributor

Re: 401K loan for down payment?

LOL, yes, too many words!

 

Actually, a loan isn't a "hardship", and loan is a loan with no outright tax consequences.  (I don't really like the 401K loans though, because when you pay it back, you are using after-tax funds, which means you are taxed on the gross payroll deduction, it goes back into your account, and whenever you get take the money out you are taxed again.) 

 

Anyway, a 401K loan (which you have to pay back) is not taxed when you withdraw it.  However, a hardship withdrawal (which you don't have to pay back) is subject to the penalty tax (from a 401K account) as well as regular taxing when you file your return.

 

I administer our 401K plan at work and deal with 401K on an almost daily basis and just wanted to clarify to the OP the tax differences.

 

So if the OP is going to use 401K funds they can either take a loan (if available through plan) up to 10 years and pay it back with taxed dollars, or they can take a 401K hardship (if funds are available and only for the amount on the GFE) and have to pay a 10% tax penalty along with regular taxes as if it were income. 

 

Message Edited by Donna1966 on 02-27-2009 03:35 PM
Message Edited by Donna1966 on 02-27-2009 03:36 PM
Message 16 of 18
Anonymous
Not applicable

Re: 401K loan for down payment?

Great explanation and also GREAT point about how you essentially wind up getting double taxed. That stinks!
Message 17 of 18
Donna1966
Regular Contributor

Re: 401K loan for down payment?

Thanks!  And yes, it does stink...and I see people taking loan after loan after loan and when they are not also contributing at that time, they are using the same money as loans over and over...now that really stinks!! lol
Message 18 of 18
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