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Booner72
Senior Contributor

Re: What exactly can a 401k be used for (home purchase hardship withdrawal)?

We had to wait until we had an open escrow account and a signed contract before the 401K company would allow us to withdraw the money.

 

We then used the money for anything we needed, including the down payment new furniture, etc.

 

We were never told that we had to spend it a certain way.

 

The only thing that is going to really count is that if we can't prove to the IRS we used the money for the house, we don't get the penalty waived.  We ended up only putting about half into our closing (down payment etc).  The rest we used for such things as moving expenses, furniture, and paying back my dad who loaned us money to pay down our credit cards.  I don't think there are 401K police out there.

STARTING: 11/24/10 EQ-584 EXP-648 TU04-595
CLOSED FIRST HOME 8/19/11 EQ-630 EXP-691 TU04-653
CURRENT: EQ-701 EXP-??? TU08-720
Message 11 of 17
rross
New Contributor

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Message 12 of 17
Walt_K
Senior Contributor

Re: What exactly can a 401k be used for (home purchase hardship withdrawal)?

I'm no expert on this by any means, so please correct me if I'm misstating anything.  But part of the problem here is that people are using terminology for withdrawals and loans interchangeably.  They are two separate things. 

 

You can take general purpose loans from your 401K depending on your plans requirements.  You can use them for anything.  I can take a loan from my 401K right now and go to Vegas.  You don't pay taxes on the loan.  There are no penalties for taking out the loan (provided you don't lose your job which provides for an accelerated payback schedule).  But loans have to be paid back.

 

A withdrawal does not have to be paid back.  I believe you do pay taxes on the withdrawal (maybe penalties as well).  I am unfamiliar with the restrictions on a withdrawal for a home purchase, but I am guessing that is where people are telling you that you have to use it for certain purposes.

 


Starting Score: ~500 (12/01/2008)
Current Score: EQ 681 (04/05/13); TU 98 728 (01/06/12), TU 08? 760 (provided by Barclay 1/2/14), TU 04 728 (lender pull 01/12/12); EX 742 (lender pull 01/12/12)
Goal Score: 720


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Message 13 of 17
BIRDWRITER
Regular Contributor

Re: What exactly can a 401k be used for (home purchase hardship withdrawal)?

Walt, you are correct. My answer was talking about loans--I gotta learn to read someday! You can take out a 10 year loan for home purchase, as opposed to 5 year for general purpose. To take a withdrawal from a plan is taxed and penalized, unless you can prove hardship. This is from IRS.Gov:

 

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))

 

Hope this helps! Smiley Tongue

Message 14 of 17
Booner72
Senior Contributor

Re: What exactly can a 401k be used for (home purchase hardship withdrawal)?

Yep -- it helps!  Ours was a withdrawal.

STARTING: 11/24/10 EQ-584 EXP-648 TU04-595
CLOSED FIRST HOME 8/19/11 EQ-630 EXP-691 TU04-653
CURRENT: EQ-701 EXP-??? TU08-720
Message 15 of 17
mauve
Valued Contributor

Re: What exactly can a 401k be used for (home purchase hardship withdrawal)?

When I decided on a home that needed rehab and lost my "up to 15k" in closing / down payment assistance, I ended up borrowing from my 401(k) for the difference.  I ended up borrowing $11,500, and since it was for a home purchase, my plan allowed me to borrow it over 30 years.  I have since quit that job, I now have to pay back the loan within 60 days of my separation date *OR* pay taxes on it as income PLUS a 10% penalty.  Rules vary based on your particular plan for loans and hardship withdrawals, but I think it's pretty consistent that you get the joy of paying penalties if it isn't a loan or if you leave employment with that party and don't pay it back.  Oh, and my loan amount was limited by "up to 50% of my vested balance" and I had to prove it was for a home purchase by sharing my GFE or something else showing my expected closing costs / down payment / etc.  There was no follow-up to figure out exaclty how I spent it and exactly how much cash I needed at closing. 


Starting Score: EQ 583 TU04 619 EX 592 (lender pull) 2010
Previous High Score: EQ 700 TU04 712 EX 726
Current Score: EQ 740 TU(Discover) 750 EX(AMEX) 747
Goal Score: 740+ all around


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Message 16 of 17
mamahearts
Frequent Contributor

Re: What exactly can a 401k be used for (home purchase hardship withdrawal)?

Just a warning!  If your 401K is through Wells and you're taking a hardship withdrawal you need to stay on them!  As soon as you get your fully executed purchase agreement fax your documents in. 

I submitted everything on 10/7.  They started processing it, but flagged the account that they needed my credit card to bill for the check to be overnighted to me.  When I called the next Tuesday they said it was approved but the check hadn't been sent yet. 

 

I called again that Friday when I hadn't heard anything.  Was told that the request had "stalled" and that when they got my credit card info on Tuesday the processor forgot to remove the flag.  So they sent it to a supervisor to have it complete processing on Monday 10/10.  I called on 10/14 and they said that it was delayed because they still hadn't completed processing.  So I called this Monday and they put a rush on it.  It completed processing and the check was sent to me on Wednesday.  I received it yesterday. 

 

Now because I don't bank with Wells my personal bank will hold the funds for 7 business days.  I need the cashier's check next Friday so I only have 5 business days.  I called the Wells branch banks to ask if they could give me a cashier's check so I could deposit it into my checking account (funds would be available in 2 days according to my sister who works at Wells).  They said no because I don't have an account but they would CASH it.  But underwriting does not like cash so that's a no go!  I finally got mad and called a different location for MY bank.  Talked to a manager and he said the first $5000 is held for 2 business days.  The rest held for 7 business days.  So we're going to be okay.  But if I'd waited any longer we'd be in trouble.

myFICO starting TU 683 8/26/11
myFICO starting EQ 645 8/26/11
myFICO EQ 652 9/26
Message 17 of 17
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