Hardship withdrawal from IRA or 401(k) for Home Purchase
I have a client who is going through a divorce and wanted to know if pulling funds out from a 401(k) or IRA falls under the definition of a hardship withdrawal. He has owned a home in the past two years(with soon to be ex-wife) and I am aware of the known exceptions but was not for sure if there was something else that falls in this category I was not aware of.
Thank you,
Permalink Submitted by mk foss on Wed, 2011-10-05 20:44
Hardship withdrawals are available for the purchase of a principal residence – doesn’t have to be a first time home purchase. In order to get the distribution, they must show that the funds aren’t available from any other source. The hardship withdrawl is taxable in full and the 10% penalty applies.
There is an exception from the 10% penalty for IRA withdrawals (up to $10K) for a first-time home purchase – but the individual doesn’t qualify for that.
A 401(k) plan can also offer employee loans. The loan would have to be paid back with amortized payments. A plan loan is usually payable in 5 years but it can be longer for a principal residence purchase. The interest on the loan is generally not tax deductible. Often a hardship withdrawal is only granted if the employee doesn’t qualify for a loan form the qualified plan.