401k hardship

[ranger05]

Hello everyone. I had a question about a 401K hardship w/d. I recently withdrew about $20,000 from my 401k to purchase the home i've been renting. The deal ended up falling throught after I had already recieved the cash. In other words, the money will not be used for the intended purpose of the loan. I can certainly use this cash in other ways and i'm really not that upset about the mortgage deal falling through. My question is, can I get in trouble of any kind for not using the money for the intended purpose? Do I need to report this to anyone? Thanks for any advice.

 

[al_bundy]

it's only illegal if they catch you

 

[ranger05]

What else could I do?? I mean the deal fell through, am i supposed to give the money back? Surly they wouldn't put it back into my 401 would they?

 

[jazz4cash]

You are probably subject to the 10% penalty which would probably apply even if the deal went through. You might be able to roll the money over to an IRA if your plan allows. You need to review the rules of your 401k Summary Plan Description. Many of the withdrawal and rollover rules are set by the employer, but the IRS will impose the penalty. Withdrawals from IRA's for 1st home purchase are non-penalty.

Did they withold taxes?

 

[ranger05]

Yes, they withheld the 10% tax penalty. The rest of the taxes I pay at the end of the year I assume.

 

[jazz4cash]

See if you can do the rollover or just put the funds back in the 401k. Otherwise you will pay ordinary income tax on the amount withdrawn PLUS the penalty of 10%

 

[ziggy29]

Is it possible to set this up so that funds are only withdrawn by wire at the time of close of escrow? That would seem to eliminate the possibility of taking a distribution for a transaction that doesn't complete.

 

[ranger05]

I'm not really interested in re-investing the cash. I would like to keep it and pay off some other bills. I know it's not smart, but i'm not really concerned about that right now. It was only a small fraction of my 401k balance, and I could really use the cash right now. My question is, if it's discovered that I did not use the withdrawal for it's intended purpose (buy a house), can I get into any kind of trouble?

 

[ranger05]

Is it possible to set this up so that funds are only withdrawn by wire at the time of close of escrow? That would seem to eliminate the possibility of taking a distribution for a transaction that doesn't complete.

There wouldn't have been any closing or transfer of deed. I was buying this house from an individual, and was planning to make monthly mortgage payments to her.

 

[ziggy29]

There wouldn't have been any closing or transfer of deed. I was buying this house from an individual, and was planning to make monthly mortgage payments to her.

Wait -- you said it was for a home purchase. How is it a home purchase if there is no closing or transfer of deed?

Sounds more like a lease-option to me.

 

[ranger05]

I should note, the withdrawal is already complete. The cash was direct deposited into my bank account and remains there today. The mortgage deal has fallen through.

 

[ranger05]

Wait -- you said it was for a home purchase. How is it a home purchase if there is no closing or transfer of deed?

Sounds more like a lease-option to me.

Does it make a differance? I mean the deal was constructed like a lease/option I guess. But there is no rent involved, 100% of my monthly payment will or would have went towards the ramaining mortgage balance.

 

[jazz4cash]

If a rollover is permitted, you would have 60 days to complete the transaction

 

[ziggy29]

Does it make a differance? I mean the deal was constructed like a lease/option I guess. But there is no rent involved, 100% of my monthly payment will or would have went towards the ramaining mortgage balance.

It does make a difference. You don't own the property unless there was a legal transfer of title.

It sounds like she was willing to provide her own seller financing and that you would be making monthly mortgage payments to her directly instead of obtaining mortgage financing from, say, a bank. And that's fine and legal, but there still needs to be a legal conferring of title to you (with her as the lienholder) somewhere along the way.

 

[FinanceDude]

Most importantr question: Are you within the 60-day window for these funds?

Until I know that, it's all conjecture........

 

[ziggy29]

Most importantr question: Are you within the 60-day window for these funds?

Good point. You could still do a rollover if so, but you'd need to come up with the taxes and penalties to rollover the full amount, or else you'd be faced with paying taxes and penalties on the portion withheld.

If you withdrew $20,000, for example, you'd probably get a $14,000 check (20% withheld for taxes and a 10% penalty). If you got a $20,000 check you probably withdrew about $28,600 -- and 30% withheld for taxes and penalties would leave you with $20K.

But if you withdrew $28,600 and you only have a $20,000 check, you'd need to find a way to come up with another $8,600 in order to do the rollover (within 60 days) or else the $8,600 would still be a distribution subject to taxes and penalties. Still, that would be better than eating taxes and penalties on the entire amount.

 

[jazz4cash]

Not all 401k's permit rollovers, so the place to start is the Summary Plan Description for the 401k.

 

[ranger05]

Good point. You could still do a rollover if so, but you'd need to come up with the taxes and penalties to rollover the full amount, or else you'd be faced with paying taxes and penalties on the portion withheld.

If you withdrew $20,000, for example, you'd probably get a $14,000 check (20% withheld for taxes and a 10% penalty). If you got a $20,000 check you probably withdrew about $28,600 -- and 30% withheld for taxes and penalties would leave you with $20K.

But if you withdrew $28,600 and you only have a $20,000 check, you'd need to find a way to come up with another $8,600 in order to do the rollover (within 60 days) or else the $8,600 would still be a distribution subject to taxes and penalties. Still, that would be better than eating taxes and penalties on the entire amount.

Yes, it was within the last 60 days. I applied for $20,000 and recieved $18,000. And applied about 3 weeks ago and recieved the cash a few days ago. Again, let me stress, I DO NOT want to re-invest this cash. I would like to keep it. I'm just wondering about the legalities of not using the withdrawal cash for it's original intended purpose. Thanks for all the replys, i'm really not a smart man when it comes to this kind of stuff.

 

[tryan]

Sounds like the 10% penalty was paid ... now you'll get a 1099 stating you received 20k (and so will the IRS) to guide your capitol gains.

 

[ranger05]

Great advise all the way around, but still, no answer to my question. I think you people can't comprehend someone would be dumb enough to WANT to take 20k out of their 401k and NOT replace it. I know it's poor, poor, money management indeed, but hey, i'm gonna do something real stupid just this one time and get myself out of debt. But i'm not interested in doing anything that could get me into any trouble. So heres what I need to know.

1. I recieved a 401k hardship withdrawal of $20,000 to purchase the home i've been renting through a "seller financed" deal.
2. I was planning on putting $15,000 down.
3. The deal has since fallen through. But I already have the cash from the withdrawal.
4. Do I need to report back to my 401k co. (Fidelity) that the money was not used for the intended purpose?
5. Do I need to report this to my place of employment?
6. Do I need to report this to the IRS?
7. Can I get into any trouble for this?
8. Can I keep this money, or do I have to give it back somehow?

Thanks.

 

[Alan]

First thing I would do is ask your plan administrator - I don't believe there will be any implications from the IRS since you will be (a) paying the taxes now instead of decades from now and (b) paying the 10% early withdrawal penalty.

 

[FinanceDude]

Should be no problems, but BE SURE to keep any info about the house you tried to buy in case the IRS asks for documentation. Since the money you took out CAN NOT be redeposited into you 401K, you can do whatever you want with the money now. After all, between penalties and taxes you'll only be getting a net of 65-75 cents on the dollar...............

 

[REWahoo]

Great advise all the way around, but still, no answer to my question. I think you people can't comprehend someone would be dumb enough to WANT to take 20k out of their 401k and NOT replace it. I know it's poor, poor, money management indeed, but hey, i'm gonna do something real stupid just this one time and get myself out of debt.

I'm not going to answer your question either, because I don't know what the legal requirements are for your situation. But I do want to ask you a few questions.

Since you got yourself in debt and want to use this 401k money to get yourself out, what's changed in your life to prevent you from getting yourself right back into debt? Wouldn't the best approach (certainly not the easiest) be to buckle down, cut your spending and pay your way out of debt? Even if you choose to go the "poor, poor, money management" route, aren't you going to have to cut your spending anyhow to stay out of debt? Have you considered what the total cost will be for the 10% penalty plus paying tax on the $20K at your marginal rate? Ouch!

As you say, it is a "stupid" way out of debt, so why do it?

 

[ranger05]

Good points REW, and I understand what your thinking. I'm really not in alot of debt. The 18k I recieved would pay off ALL my bills and still leave me 10-12k left. I guess I really just WANT to keep this money for some reason. I guess I could reinvest some of it. But, again, I just wanted to make sure I wasn't doing something illegal.

 

[ziggy29]

Good points REW, and I understand what your thinking. I'm really not in alot of debt. The 18k I recieved would pay off ALL my bills and still leave me 10-12k left. I guess I really just WANT to keep this money for some reason. I guess I could reinvest some of it. But, again, I just wanted to make sure I wasn't doing something illegal.

You don't need a reason to pull money out if you are willing to pay taxes and the 10% penalty.

Of course, in some situations, when considering federal and state income taxes and the penalty, it could result in pulling out 2X and only getting X.