Over the years you have slow but sure, steadily funded your retirement account.
For well, the day of when you hopefully make it to the Golden Years of your life. But along the way toward that point, it can be tempting to see all that money. To think of why not use it to invest in a home?
Especially when divorce happens, thinking of renting with the split time sharing, raising the kids.
But wishing there was a way to buy and not wait.
To create the home to continue the childhood traditions, memory making. To get those kids healed, raised, launched successfully out of the household nest.
Retirement money account withdrawals to buy a house, etc by using the what some plans offer called the "hardship allowance".
Too easy, not a good idea. But even bigger than all that. What does the IRS say about tapping into a the saved for retirement day fund?
The IRS says ...
Under what circumstances can a participant get a hardship distribution from a retirement plan?
A retirement plan may, but is not required to, provide for hardship distributions. Many plans that provide for elective deferrals provide for hardship distributions. Thus, 401(k) plans, 403(b) plans, and 457(b) plans may permit hardship distributions.
If a 401(k) plan provides for hardship distributions, it must provide the specific criteria used to make the determination of hardship. Thus, for example, a plan may provide that a distribution can be made only for medical or funeral expenses, but not for the purchase of a principal residence or for payment of tuition and education expenses. In determining the existence of a need and of the amount necessary to meet the need, the plan must specify and apply nondiscriminatory and objective standards.
Does your 401(k) plan made hardship distributions that didn’t follow the plan language of where you work? Talk to your financial advisor, your accountant to learn what measures need to be taken to fix that.
The rules for hardship distributions from 403(b) plans are similar to those for hardship distributions from 401(k) plans.
If a 457(b) plan provides for hardship distributions, it must contain specific language defining what constitutes a distribution on account of an "unforeseeable emergency."
(Reg. § 1.457-6(c)(2))
You need to check the fine print of the plan where you work, to see if the employer allows the hardship exercise or not to be taken.
And if you do, further contribution rules to the plan until the money is paid back, is restored could be in the lingo to read, reread.
And then run by your bean counter so you don't get a big headache.
When the CPA tells you what you did not know. But should have.
Settling up the debt before you leave the employment is part of the fine print.
And if the fund "loan" is not repaid before you leave your employer it is treated as an unqualified distribution. In other words, added to your annual income.
Plus a 10% penalty on top of being subject to your normal income tax rate.
It's designed that way to make it easier to contribute to what you set up. Not to skip in and make it open the cookie jar easy. To reach in, pull out some or all of the funds.To protect you from yourself. To keep what you create for a nest egg preserved.
Check the fine print before raiding your retirement or profit sharing account to buy a home.
We do have buyers of real estate that tap into that retirement account. Had one today that can borrow if paid back at a rate of 1.5% which she will do. She is using the money to buy a home in Northern Maine. After her transfer to a new goverment job in Aroostook County where she needs to buy a new Maine house.
Read more on working with Uncle Sam to fund a home from a retirement account.
I'm Maine REALTOR Andrew Mooers, ME Broker
MOOERS REALTY 69 North Street Houlton Maine 04730