Cashing in an IRA

I found this FAQ and answer on the irs.gov web site:

Many 403b plans allow a distribution for the first time purchase of a home. Start by asking the plan administrator, hopefully they are well versed in their plans distribution rules (hardship and otherwise). If they are an "empty uniform", consult your summary plan document. The rules are generally the same as those of a 401k.

There is likely no need to employ an IRA, which is good because you probably can't. Typically, qualified plans do not allow for in-service withdrawals while employed. Loans and hardship distributions are standard but not required.

As for taxation: Any distribution will be subject to ordinary income tax. The "$10k house rule" only gets you out of paying the 10% early withdrawal penalty. The 10% penalty is not "front-loaded and adjusted at tax time". However, the IRS mandates that 20% be withheld from non- qualified distributions. I do not THINK this can be avoided even for home purchases. Check with your plan admin.

The time it takes is totally dependent on your 403b plan provider. Customarily, you must submit a distribution request to the plan admin. The admin then confirms that the paperwork is in good order and you are eligible for the request being made. They then notify the plan provider (like John Hancock or Fidelity) who issues a check for the funds. 5-10 business days is normal.

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Thanks, Dave. That answers my question. I appreciate your researching for me.

John

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Have you considered getting a loan from your 403B?

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Beware of getting tax advice from your H.R. department.

What is all-important is the distribution code on the 1099-R you (and the IRS) will receive. If it is code "1", and the IRA box is not checked, you will pay an early-distribution penalty (10% federal plus possibly some amount for state) in addition to regular tax.

In other words, to answer your question about "front-loaded", no, you are not right. If you don't elect appropriate withholding, and don't make estimated tax payments or increase other types of withholding, you will most likely have an underpayment penalty on your tax return(s) in addition to the early-distribution penalty.

-Mark Bole

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Assume you can rollover money from the 403(b) to a Traditional IRA. (That's a big assumption, but let's just assume for now you can.) Then you do get to withdraw $10k from the IRA penalty free. But fact is, $10k is not a lot of money when it comes to a home purchase these days. Have you run the numbers for foregoing cashing in part of your retirement plan and instead saving the money for the downpayment? Or perhaps just financing the $10k through the lender and suffering the PMI for awhile?

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ARE you receiving a distribution from a 401k that is eligible to roll over into an IRA??? What is going to be your distribution request from your employer. Hardship? Retirement? Severance from employement?

I think you skimmed over that "IF" to quickly.

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