401k hardship and Quit Claim

[curioustaxpayer]

I live in Illinois, and my parents own the home I'm currently living in. There is no mortgage on the property. This was due to a messy divorce and my ex not allowing me to purchase a home while we were still in litigation. Now, the plan is for me to file a Quit Claim to get my name on the title, in addition to theirs. Am I allowed to claim a 401k hardship withdrawal to pay my parents from my 401k savings, as long as that amount is listed as the exchanged amount on the Quit Claim? I know I would still pay income taxes on the withdrawn money. I'm expecting I would not have to pay the penalty for early withdrawal. Is that correct? Are there any other tax implications for myself or my parents that I am not thinking of?

Thanks.

 

[Zigner]

This is not a hardship withdrawal, nor is it a withdrawal for a down payment on a house.

 

[curioustaxpayer]

But it is for acquiring ownership on a principal residence.

Are you suggesting that I would have to purchase the home from my parents, and acquire a mortgage in order to take out the funds without penalty?

 

[LdiJ]

But it is for acquiring ownership on a principal residence.

Are you suggesting that I would have to purchase the home from my parents, and acquire a mortgage in order to take out the funds without penalty?

You need to wait until your divorce is finalized and all division of marital assets has taken place before you enter into any purchase of a home.

The exception to penalty for money used to purchase a first time primary residence applies to IRAs only and is limited to 10k as a down payment. So, if you wanted to use 401k money it would have to qualify for a 401k loan and you would have to pay the money back to your 401k. In that instance, you are really better off just getting a mortgage or buying the home from your parents on contract.

 

[FlyingRon]

That's not quite true LdiJ. A 401k can have a hardship withdrawal for a principal residence purchase IF THE PLAN ALLOWS IT, but there are strings on it that don't apply to IRAs,

It is as you say, a bad idea in general, and really bad in the current situation.

 

[Taxing Matters]

That's not quite true LdiJ. A 401k can have a hardship withdrawal for a principal residence purchase IF THE PLAN ALLOWS IT, but there are strings on it that don't apply to IRAs.

The Code does not allow for the exception from the early withdrawal penalty for the purchase of a principal residence. Ldij got that right. The IRS has a handy chart that tells you what exceptions apply to qualified pension plans like 401(k) plans and which ones apply to IRAs, SEP, and SARSEP plans. You will see on the chart that the exception for purchase of a principal residence does not apply to 401(k) plans.

 

[curioustaxpayer]

The divorce has been finalized for a while now, but I've accrued debt from legal fees, childcare services, and repairs to my current residence, so I was hoping for a way to leverage some of those savings, but it looks like I'll need to take the penalty. Thanks everyone for the help. Taxing Matters, that chart was exactly what I needed to move forward. Thank you.

 

[FlyingRon]

I stand corrected, sorry Ldij. Principal residence and educational expenses are indeed only eligible for IRAs (and some of the other plans like 403). I was referring to a secondary source which itself was incorrect.

 

[LdiJ]

I stand corrected, sorry Ldij. Principal residence and educational expenses are indeed only eligible for IRAs (and some of the other plans like 403). I was referring to a secondary source which itself was incorrect.

No problem, I certainly have been wrong myself sometimes too. The tax code is complex enough that nobody can know everything.

 

[Taxing Matters]

Taxing Matters, that chart was exactly what I needed to move forward. Thank you.

I'm glad the chart was useful. The IRS site is chock full of great info, but sometimes finding exactly what you want can be a challenge. So when I find something useful there, I bookmark it right away so I don't risk not being able to find it should I need it again later. I had this one saved so providing it was easy.

The tax code is complex enough that nobody can know everything.

Once upon a time in my youth I tried to know everything. It hurt my brain trying to cram all that information into it. And with tax law, even if you manged to learn it all what you know ends up being outdated fairly quickly as tax law changes much faster than any other major area of the law.

 

[LdiJ]

I'm glad the chart was useful. The IRS site is chock full of great info, but sometimes finding exactly what you want can be a challenge. So when I find something useful there, I bookmark it right away so I don't risk not being able to find it should I need it again later. I had this one saved so providing it was easy.

Some years back I was told by an IRS agent that its easier to find information on the IRS website if you use google as your search engine rather than the search engine on the IRS site. I have used that hint ever since because I do seem to find things much quicker that way.

Once upon a time in my youth I tried to know everything. It hurt my brain trying to cram all that information into it. And with tax law, even if you manged to learn it all what you know ends up being outdated fairly quickly as tax law changes much faster than any other major area of the law.

Just look at this year as the prime example of outdated quickly

 

[Taxing Matters]

Some years back I was told by an IRS agent that its easier to find information on the IRS website if you use google as your search engine rather than the search engine on the IRS site. I have used that hint ever since because I do seem to find things much quicker that way.

I use both and between the two I can often find what I want without too much trouble. As I recall a long time ago in an internet far, far away the IRS used Google for its internal engine (as did a lot of organizations). That was very early on before Google realized the value of having everyone run the searches using its internet engine and serving up ads to them. Now that it has become the galactic search engine empire if Google licenses its search engine to organizations today (and I don't know off the top of my head if they do) I bet it charges an arm and leg for it. Maybe even your first born. The IRS search engine suffered when they had to use their own search algorithm rather than using Google.