Hardship withdrawal for construction of primary residence

[Guest tlarson]

I know that the purchase of LAND does not qualify under the safe harbor rules for a hardship withdrawal, but what about the construction of a home? And, if it qualifies, what would be the definition of the hardship amount? Down payment on materials?

[Guest dynalow]

you may apply for a hardship distribution to purchase a primary home to a max of 100% of the contributions only, no earnings. It will be taxable as odinary income plus an addition 10% penalty if under 59.5. (the exclusion of the 10% only applies to IRAs, however hardship distributions are not allowed to be rolled to an IRA, 20% withholding is not required on hardship dist.)

I believe you also would be restricted from contributiong to the 401k for 1 year unless it is a matching plan or a condition of employment or an alternate plan to social sec.

I AM ASSUMING YOU ARE STILL EMPLOYED WITH THE EMPLOYER OF WHERE YOU MADE THE CONTRIBUTIONS Through?

Many people tend to believe that the Exlusion of the 10% penalty on upto $10k for buying a first time home also applies to hardship withdrawals from 401k or 403b plans, but it not the case.

If your no long er employed at the participating Institution, simply take a regular withdrawal and have it directly rolled to an IRA and then take the withdrawal from the IRA and then the 10% exlusion would apply for first time home buy, even if new const.

The hardship distribution usually is approved by the employer to their satisfaction.

[Guest Joe Vasko]

I would first check your plan document. If the document allows for participant loans, then this must be the first course of action before a hardship distribution can be made.

[Erik Read]

The loan provision may be the first course of action however, if the participant is looking to take a hardship, my assumption is that they have exhausted their ability to get a construction loan from a bank (another option that needs to be looked at before the hardship is approved). If a bank has denied the participant a loan, then the Investment/Loan committee may have a hard time approving a loan from the plan - credit worthiness and all - which then puts the participant back at the hardship provision.

Hope I've laid that out well, and didn't confuse anyone.