I planned to raid my 401(k) to help me pay the downpayment on a house. The closing is later this month. I've learned many things in the house-building and house-buying process. This subject I thought worth sharing. What I already knew going in was: * You can take a hardship withdrawal out of your 401(k) for a few things like medical expenses and buying your first home (if it is a primary residence). * You don't pay any penalty on a hardship withdrawal and you are granted some flexibility on tax assessment as well. * Unlike a loan from your 401(k), you don't have to ever pay the money back. * Also unlike a loan, you're not limited to 50%. You can wipe the account out. What I have learned just today, long after the decision-making process was done, was: * Depending on the plan you are in, most likely you don't have unfettered access to the money you are supposed to have unfettered access to under the hardship withdrawal. In my case, I can only take out money that went in during my tenure with my current employer. Money that was rolled-over from my previous employer is locked up, hardships be damned (thank god this is just a house and not heart surgery). Other plans might give you access to rolled-over money but not money put in under your current employer. There might be conditions on the vested amount or unvested amount. I get the feeling the possibilities are endless. * Because of the nature of this plan, over half of the money I expected to get -- and indeed relied on -- is not available to me. I can borrow half of it and start paying my own plan back. Or, I can withdraw it anyway and pay a 10% penalty over and above taxes to get it. If anyone knows why these rules were thought to have been a good idea by anybody, please respond; I'd really like to know. If you have other fun facts about the 401(k) plan, post those too so they don't sneak up and posterize me later. PS. Don't worry about the house. I will still buy it, hell or high water, by hook or by crook. The question is only how financially crippled will I be once I do.
I wonder if those rules apply if you rollover your total 401(k)savings into an IRA with a bank. They wouldn't have any idea how much of your total comes from different employers. I guess its dependent on each institution's rules and regulations. Something I'm going to have to look into if I ever have to take money out of that account, especially seeing how my extended unemployment benefits expire at the end of this month and than I'm living, sans income, off my savings.
FYI- You can only take the penalty free distribution for a first home out of an IRA, you can't do it out of a 401(k). This you be your last resort for getting cash anyway. You will owe income tax one the money (most likely at a 27% rate) in the year you take it out. It is best to leave that money alone & let it grow (hopefully!) tax deferred until you reach retirement age.
Well, I've already done it, so I'd have to contest your assertion that it can't be done with a 401(k). You're right that it is supposed to be the last resort for getting cash. Everything else has been exhausted short of selling my car (which is financial suicide in Houston).
Well you are not suposed to be able to do that. I hope you don't get that 10% penalty imposed on you! Who told you you could make the distribution?
You will owe taxes plus a 10% penalty come tax time. I should know, I raided my 401k for exactly the same reason. Be sure that there were enough taxes held out of your distribution. My withdrawl put me in a higher tax bracket which put me in an even bigger burden.
Well, my HR department here said it was possible, plus I've seen it in some articles about 401(k)s generally, plus the form I filled out to get the money said so explicitly, plus they mailed me my check and it is currently in my possession. I suppose they can get me at income tax time, like Brad is saying. But, that hadn't been my understanding heretofore. Plenty of people I mention it to say, 'Whoa you can't do that.' And, I have had trouble finding good information about it in public sources like the internet (which is why I wanted to start this thread). But, the sources that have said I can have more credibility to me than the ones that have said I can't. And, well if you're right and I get slapped with a 10% penalty, that would be just fitting and in keeping with the general theme of "JV is building himself a house; free money for everybody!" I don't even want to think about how much money I've spent in getting nothing in return just because this endeavor has painted a big target on my chest.
Here is some info from Fidelity. You should have similar info fromt he company that manages your 401K: "There are some plans which allow you to withdraw money for any reason, though they are rare. Generally, most plans require that you use the money only for a financial hardship. We all face hardships of varying degrees every day, but those which qualify for a 401(k) withdrawal are usually very limited. Many employers do not want to set up plans that require them to decide on a case-by-case basis who can withdraw money and who can't. So they use the safe harbor guidelines set forth by the Internal Revenue Service. According to the guidelines, the withdrawal must be due to an immediate and heavy financial need and the withdrawal must be necessary to satisfy that need. That really means that you would have had to have used all other options (including borrowing from your 401(k) plan account) before you get to this stage. Safe harbor hardship withdrawals are limited to: Certain medical expenses for you, your spouse or your dependents Purchase of a primary residence (excluding mortgage payment) Payments of certain post-secondary education expenses for the next year for you, your spouse or your dependents To prevent eviction from or foreclosure on your primary home Please be advised that if you take a hardship withdrawal from the plan following "safe harbor" rules, you may be suspended from making contributions to the plan for a minimum of six months. As a result of the Economic Growth and Tax Relief Reconciliation Act of 2001, hardship withdrawals are not eligible to be rolled over, and are not subject to a federal income tax withholding. You may still owe income taxes and a possible 10% early withdrawal penalty if you are under 59 1/2 when you file your annual income tax return. State and local taxes may also apply. Please note: You should consult your financial/tax adviser with specific questions about your personal situation if you are considering a withdrawal from your plan account."
I think what all of this is saying, I know what I meant to be saying, is that it will be subject to the penalty of 10% in addition to regular income tax. So basically if you take out $10,000 it will really only be like $6,000 after tax & penalty. So you are correct in that you can physically take the money out, it will just be subject to the 10% penalty. However if you were taking the distribution out of an IRA & it were for a qualified first time home purchase then up to $10,000 would not be qubject to the 10% penalty.
