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

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Anonymous — Tue, 14 Feb 2012 22:49:32 GMT

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

austinguy907 — Tue, 11 Oct 2011 22:25:35 GMT

I took out some cash from my Roth IRA which falls under the same tax code. I think the limit for a one time withdrawl for 1st time home buyer is $10K. I'm not sure that you can use it for anything other than the Down Payment but, you might get an answer here otherwise. I would suggest checking with a CPA should be a quick and free phone call or ask your agent you're using to purchase. They should know or be able to find out for you.

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

Watchmann — Wed, 12 Oct 2011 01:30:27 GMT

Most people tap their IRA's for this purpose, but you can do a hardship 401(k) withdrawal for a house purchase, but you'll get whacked with income tax AND a 10% penaly AND you can't make contributions for six months. Not a good way to go about it. You would be better off taking a loan, up to $50,000, from your employer's plan and paying it back up to 5 years in length. You'll have to check on the plan with your employer.

IRA money does NOT have to be used for the down payment, but there are strict requirements that the withdrawal has to occur within a certain number of days of closing. Maximum lifetime withdrawal is $10k per taxpayer (married couple can extract $20k if they each have an IRA). And of course you pay tax on the amount withdrawn at ordinary income tax rates.

Here are the key points for a traditional IRA:

First-home exemption
If you're married, and you and your spouse are both first-time buyers, you each can pull from retirement accounts, giving you $20,000 in residential cash.

Even better is the IRS definition of first-time homebuyer. Technically, you don't have to be purchasing your very first abode. You qualify under the tax rules as long as you, or your spouse, didn't own a principal residence at any time during the previous two years. In fact, you can even share your IRA wealth. The IRS says the first-time homebuyer using your IRA funds for a down payment can be you, your spouse, one of your children, a grandchild or a parent.

Be careful not to take out your money too soon. You must use the IRA funds within 120 days of withdrawal to pay qualified acquisition costs. This includes the costs of buying, building or rebuilding a home, along with any usual settlement, financing or closing costs.

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

Booner72 — Wed, 12 Oct 2011 03:26:18 GMT

@Watchmann wrote:
Most people tap their IRA's for this purpose, but you can do a hardship 401(k) withdrawal for a house purchase, but you'll get whacked with income tax AND a 10% penaly AND you can't make contributions for six months. Not a good way to go about it. You would be better off taking a loan, up to $50,000, from your employer's plan and paying it back up to 5 years in length. You'll have to check on the plan with your employer.

IRA money does NOT have to be used for the down payment, but there are strict requirements that the withdrawal has to occur within a certain number of days of closing. Maximum lifetime withdrawal is $10k per taxpayer (married couple can extract $20k if they each have an IRA). And of course you pay tax on the amount withdrawn at ordinary income tax rates.

Here are the key points for a traditional IRA:

First-home exemption
If you're married, and you and your spouse are both first-time buyers, you each can pull from retirement accounts, giving you $20,000 in residential cash.
Even better is the IRS definition of first-time homebuyer. Technically, you don't have to be purchasing your very first abode. You qualify under the tax rules as long as you, or your spouse, didn't own a principal residence at any time during the previous two years. In fact, you can even share your IRA wealth. The IRS says the first-time homebuyer using your IRA funds for a down payment can be you, your spouse, one of your children, a grandchild or a parent.
Be careful not to take out your money too soon. You must use the IRA funds within 120 days of withdrawal to pay qualified acquisition costs. This includes the costs of buying, building or rebuilding a home, along with any usual settlement, financing or closing costs.

WATCHMAN, I LOVE YOU! DH took out money from his 401K for our first home but he's not on the loan so i didn't know if he'd get the penalty waived. Since your post says it can even apply to kids, it surely should apply to me! YAY

OP - sorry for the hijack. I couldnt help myself.

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Anonymous — Tue, 14 Feb 2012 22:50:36 GMT

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

lmgood — Wed, 12 Oct 2011 14:58:42 GMT

When you submit your loan request - you'll be asked to provide a copy of the accepted offer, or other proof that you're actually buying a house. After that, you can use that money towards your down payment and whatever else you might need. I wondered the same thing when I went through this in August. I pulled out X amount of dollars from my 401k - used 1/3 of it to pay down payment and closing costs. The remainder I have been using to buy things that I don't currently have (couch, tables - my previous roommate owned all that) and to make sure I have a few months of living expenses in savings just in case. Hope that helps.

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Anonymous — Tue, 14 Feb 2012 22:50:14 GMT

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

mamahearts — Wed, 12 Oct 2011 15:20:56 GMT

@lmgood wrote:
When you submit your loan request - you'll be asked to provide a copy of the accepted offer, or other proof that you're actually buying a house. After that, you can use that money towards your down payment and whatever else you might need. I wondered the same thing when I went through this in August. I pulled out X amount of dollars from my 401k - used 1/3 of it to pay down payment and closing costs. The remainder I have been using to buy things that I don't currently have (couch, tables - my previous roommate owned all that) and to make sure I have a few months of living expenses in savings just in case. Hope that helps.

I'm doing the same thing. Part of the funds are going towards my down payment and our part of the closing costs. Also going to split the cost of the radon mitigation system with the seller. In the spring we're probably going to need to add some vents to the garage attic so I wanted funds for that. Since there is a penalty and you're only allowed to do this once, I wanted to make sure I'd have funds there in case something pops up (like this radon thing).

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

lmgood — Wed, 12 Oct 2011 16:57:20 GMT

You're very welcome

My closing costs changed so many times in the last couple of weeks before I finally closed, that I didn't know how much I was going to need or have left over. But when the rates dropped like a hot potato, I was able to lock in at a pretty good rate, which lowered my down payment, and I was suprised w/ extra money back from HUD for closing costs. So I went from needing to take over $12k to closing, to only need $7,700 - yay!

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

BIRDWRITER — Wed, 12 Oct 2011 17:15:20 GMT

Hi, rules might vary according to your plan. I am in the process of making a withdrawal right now. With my plan, I can withdraw up to half the value of my savings (with a rolling limit of 50K per year) for any purpose, with a maximum 5 year repayment schedule. For a home purchase only, everything else is the same, but it can be paid back over 10 years. My administrator requested a copy of sales agreement to prove it was for a primary residence, but that's it.

GL!

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

Booner72 — Wed, 12 Oct 2011 18:52:33 GMT

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.

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Anonymous — Tue, 14 Feb 2012 22:49:51 GMT

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

Walt_K — Wed, 12 Oct 2011 22:10:59 GMT

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.

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

BIRDWRITER — Wed, 12 Oct 2011 22:45:14 GMT

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!

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

Booner72 — Wed, 12 Oct 2011 23:59:05 GMT

Yep -- it helps! Ours was a withdrawal.

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

Anonymous — Sat, 15 Oct 2011 01:00:00 GMT

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.

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

mamahearts — Fri, 21 Oct 2011 15:25:32 GMT

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.