403b question and a first time home purchase...

[lost_one]

What is the name of your state? We are from CA, but moving and purchasing in NC.

My wife works for a worldwide non-profit organization and has a 403b account. The plan administrator agents are providing information that doesn't exactly sound right to me, so I wanted to check if anyone knows the fed laws and if the admin can have rules that take over fed laws.

We are first time home buyers and have a house under contract to purchase in NC. We were planning on getting money from her 403b acct to be used on the down payment.

From what I understood from the documentation is that you can either
1) take out a loan up to 50% of the vested account value
2) Claim a hardship and withdrawl money taking a 10% fed fee for early distribution (she's not 59.5+ years old)

I know there are lots of rules for these accounts and stipulations for first time home purchases. What I need to know is there some fed law that says you can withdraw from the acct without fine if it's for a home purchase.

The hardship position is interesting the plan admin states that you can't claim hardship unless you've exahusted all loan options first. This brings up an interesting cross arguement in that taking a loan vs a straight hardship distribution would cause you extra hardship as the loan will be an extra financial hardship you can't take on at this point. (This is much worse that the interst in a the loan they offer is about 10%...)

Are there any federal laws that allow frist time buyers to use the funds without penalty and only have to claim the money as income?

 

[cbg]

My knowledge is with regards to 401k's; however, it is my understanding that the rules for 403b's are the same or similar.

Federal law recognizes four reasons for withdrawal from a 401k (and I assume a 403b as well) without penalty; one of them is for the purchase of one's primary residence.

However, Federal law does not REQUIRE that the specific plan document allow for any kind of hardship withdrawal. The plan document dictates whether or not loans or hardship withdrawals of any kind are permitted. If so, as long as they stay within the regulations set down by Federal law, the plan document will determine whether to permit them and if so, under what circumstances.

So, although the law ALLOWS the plan document to permit a withdrawal for this purpose, it does not REQUIRE that it be permitted.

 

[lost_one]

Thanks, that makes sense. (if it's the same as 401k)

I'm still concerned if the plan could require to take out a loan from the funds before taking a hardship withdrawal. That seems just stupid to me, but you never know.

Because of this rule we started to think about creative ways to get around the rules... we came up with two

1) take out a loan for 50% of her balance, and then take out a hardship withdrawal for the second 50% and use the hardship money to pay off the 50% balance loan. We don't like this option as it seems like a bad way to go about it, could it be illegal to do this way?

2) The plan has a max of 1 loan per 12 month period. So could you do a loan of the min amount ($1K) and then claim a hardship in any amount for the home purchase. That's a question for them.

We don't want to do anything too creative and get in trouble. But, from what's been said a primary home purchase is a completely valid reason for a hardship withdrawal.

 

[cbg]

The plan can legally permit loans but not hardship withdrawals.

It can permit hardship withdrawals but not loans.

It can permit both loans and hardship withdrawals.,

It can permit neither loans nor hardship withdrawals.

It can insist that a loan be taken before a hardship withdrawal.

I am 99.99% sure that your option #1 would be illegal.

Option #2 is a question only your administrator can asnwer.

 

[lost_one]

...
Option #2 is a question only your administrator can asnwer.

Pretty much sounds like they can do whatever they want, huh?

The admin said that option #2 was the only way to do this. So, that's what will be done to play within the rules they have.

Thanks!

 

[efflandt]

Where does anything say you can take a "distribution" from 401k or 403b for home purchase without getting hit with 10% penalty? The plan administrator should have any requirements regarding loans or distributions (which can vary somewhat by plan). Note that you would pay such a loan back with taxed money and the interest is NOT tax deductable.

http://www.irs.gov/ publication 571 covers 403b, and 575 with more general info about pensions/annuities, has more details about distributions.

In order to take a distribution (instead of a loan), it might have to be rolled over into an IRA first. You are allowed to take up to $10k/person distribution from an IRA for first-time home purchase without the 10% penalty. See pages 47-49 of publication 590 for details and qualifications.

 

[lost_one]

efflandt, you asking me where it says that? I don't know but the people my wife and I have spoke with have all said that. The 403b is very close to 401k, but very different that's why I was asking.

The rollover idea is an interesting one, but I didn't see anything about being able to rollover if you are still an active participant in the plan. Is that really an option if you haven't terminated your employment?

 

[efflandt]

I am not really familiar with 403b, just pointed you to IRS website where you can find related official publications, and search for anything about distribution penalty exception for home purchase.

Your plan administrator should be able to tell you what is allowed or not.

One thing to research is whether termination of employment there (by choice or not) would make a loan from the plan immediately due and payable (subject to tax and penalty if not paid back then). I know that is a risk with a 401k.

 

[lost_one]

I am not really familiar with 403b, just pointed you to IRS website where you can find related official publications, and search for anything about distribution penalty exception for home purchase.

Your plan administrator should be able to tell you what is allowed or not.

One thing to research is whether termination of employment there (by choice or not) would make a loan from the plan immediately due and payable (subject to tax and penalty if not paid back then). I know that is a risk with a 401k.

Thanks and yes the termination condition was one of the first things checked. Had a heads up on that from past 401k loans.

As to the administrator being able to answers those question... nothing if further from the truth. My wife has talked to the plan admins maybe 5 times and each time she gets a different response. I keep pushing her to ask for a supervisor with the hope that a sup may have a clue. The one supervisor she spoke with was able to get her a way to do it within the rules. But, I'm not so sure just because they say it's OK to do that it really is. Along with that I don't really trust my wife to be asking the correct questions 100% of the time. She's been good, but not great. The combination of misinformation and unasked questions scares me when dealing with the IRS.

I didn't get a chance to check out your link, but I did go through most of the stuff I found on my own before posting here. I'll check if your link provides any helpful info.

Thanks!