[rlboyd987]

I own my primary residence and if I sell it, the proceeds would cover the 1st and 2nd mortgages and closing costs - I wouldn't receive any funds at closing. So my house is not 'upside down' but it isn't 'right-side up' either. Foreclosure is NOT imminent.

I want to sell this home a buy a smaller, cheaper one with more affordable payments. Would I qualify for a 401k hardship withdrawal to buy a principal residence - I would use the funds to make the down-payment and cover other closing costs? My company's administrator thinks this wouldn't count as a 'principal residence' since I currently own my home - even though I would be selling my current home (the purchase of the new home would be contingent on selling the current home).

What if I sold my current home first, and then bought the other home? If that works, how much time has to elapse before I can buy the other home using 401k hardship withdrawal funds?

[ebaines]

Using your 401(k) to buy a residence is NOT considered to be a "hardship withdrawal" - sorry. You may be confusing the 401(k) hardship withdrawal rules with IRA withdrawal rules - using IRA money to buy, build, or rebuild a first home (up tp $10K) is consiered to be a hardship withdrawal from an IRA. But since this is not your first residence, it wouldn't apply anyway. Consequently:

1. Whether the 401(k) plan at your company allows employees to make withdrawals for the purchase of a home is dependent entirely on the specifics of your plan - so your plan administrator will have to answer that. However, unlike hardship withdrawals, the IRS does not require that your company allow you to make a withdrawal for this purpose, and most plans do not allow it.

2, If it turns out that your company plan does allow you to make such a withdrawal, you will have to pay both income tax and the 10% early withdrawal penalty on it (I am assuming that you are under age 59-1/2).

Have you considered instead taking a loan against your 401(k) balance? That way you avoid taxes and penalties, and you effectively pay yourself interest as you repay the loan. For most people taking a loan from your401(k) works out better than taking a withdrawal.

[rlboyd987]

Thanks for your response, but a 401(k) hardship withdrawal CAN be used to purchase a primary residence. Here's a link to the IRS site:

401(k) Resource Guide - Plan Sponsors - General Distribution Rules

Which says "Costs directly related to the purchase of a principal residence for the employee (excluding mortgage payments);"

[ebaines]

Thanks for your response, but a 401(k) hardship withdrawal CAN be used to purchase a primary residence. Here's a link to the IRS site:

401(k) Resource Guide - Plan Sponsors - General Distribution Rules

which says "Costs directly related to the purchase of a principal residence for the employee (excluding mortgage payments);"

My apoligies - you are correct. I'm afraid I was thinking about the 10% penalty rather than a "hardship." Sorry for the error.

The term "principal residence" means that this home is to be your principal residence (not a 2nd home or vacation property). I don't think it matters what the timing is - the fact that you have a current principal residence does not mean that the next home won't be your principal residence - as long as your intent is to move into it right away.

Have you considered a loan instead, to avoid the 10% penalty and income tax?

[rlboyd987]

For some reason, my plan administrator thinks otherwise on the definition of 'principal residence'.

Are you a lawyer? I'm trying to convince her to contact our company lawyer but she is hesitant to spend the money to get the definitive answer. I'd like to be able to say 'but a knowledgeable lawyer told me... ' so that she will realize that she is probably wrong and will contact the company lawyer.

FYI, I considered a loan (and would prefer it) but it wouldn't get me enough money for closing.

[ebaines]

No - I am not a lawyer, sorry.

By his reasoning, only homeless people could ever qualify for a withdrawal to buy a principal residence, because everyone else already has a current principal residence. He seems to be confusing purchase of a "principal residence" with "first home purchase." Ask him this - if you were currently living in a leased apartment as your principal residence, does he agree that the plan would allow you to make a withdrawal to purchase a new principal residence? It seems pretty obvious that it would. So what's the difference if you already own (rather than rent) your current principal residence?

I did some searches on the web for "definition of principle residence." and have come up with this:
IRS' definition of Primary Residence...

PRINCIPAL RESIDENCE.
In the case of a taxpayer using more than one property as a residence, whether property is used by the taxpayer as the taxpayer's principal residence depends upon all the facts and circumstances.

If a taxpayer alternates between 2 properties, using each as a residence for successive periods of time, the property that the taxpayer uses a majority of the time during the year ordinarily will be considered the taxpayer's principal residence.

In addition to the taxpayer's use of the property, relevant factors in determining a taxpayer's principal residence, include, but are not limited to:

(i) The taxpayer's place of employment;
(ii) The principal place of abode of the taxpayer's family members;
(iii) The address listed on the taxpayer's federal and state tax returns, driver's license, automobile registration, and voter registration card;
(iv) The taxpayer's mailing address for bills and correspondence;
(v) The location of the taxpayer's banks; and
(vi) The location of religious organizations and recreational clubs with which the taxpayer is affiliated.

Notice that the determination of what property is your principal residence has a lot to do with your personal circumstance - do you sleep there most often, do you list the new property as your home address at work, does your driver's license show the new address, do you have all your tax correspondence going there? So again - assuming you plan to move into the new home as soon as you close on it, and treat it as your home, then you are indeed purchasing a principal residence.

[ScottGem]

You do not have to be a lawyer to read and understand the tax code which is where 401(k) rules reside.

One thing you don't seem to understand is that plans to NOT have to allow withdrawals at all. So a hardship withdrawal just allows you to qualify for a withdrawal. It doesn't waive the 10% penalty, not does it eliminate the tax bite. So if you do get a withdrawal, you will need to pay that 10% AND pay taxes on the distribution. You have to include those factors in the equation.

You will be MUCH better off taking a loan against the 401(k) then withdrawing.

[rlboyd987]

ScottGEM:

You do have to be a lawyer to convince my plan administrator what the IRS rules are - as I stated earlier.

And I DO understand that it is up to the plan to decide whether to allow the withdrawal. Their objection is that the IRS would not allow it - so I'm trying to find out if that is a legitimate objection. They said they would do it if the IRS allowed it.

And I DO understand the financial costs of doing this - I stated earlier that I would do a loan if it resulted in enough $$$ but it doesn't.

If you have any relevant comments I'd appreciate it, but your response was pretty useless and somewhat insulting.