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Edward Stephens
  • Realtor and Investor
  • Olathe, KS
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Should I take a hardship withdrawal from my 401(k) for a down payment?

Edward Stephens
  • Realtor and Investor
  • Olathe, KS
Posted Jul 24 2015, 00:08

Dear BP Community,

I am actively looking to purchase both units of a duplex, live in one unit and lease one unit (house hack). I found a property that I'm considering making an offer on, and I'm analyzing different ways to pay for the down payment and closing costs. The property is listed at $180k and I'll be applying for an FHA loan (@ 3.5% down + closing costs = $10k).

I have the money in my bank savings account now to make the down payment, or I could use my traditional 401k to fund the purchase. I’m not allowed to take out a loan on my 401k per my plan’s rules, but I can take a hardship withdrawal to cover closing costs and a down payment. Once I take this hardship withdrawal, it is my understanding I cannot ever take another one for any reason (is this true?). The penalty for a hardship withdrawal is 10%. I also have to pay taxes on the funds, although I’ll defer the payment of all these taxes until tax season next year. I can use the money in my bank savings to help me purchase my next investment property in December (I won’t live there), which I anticipate will require a 20% down payment. Also, I won’t be eligible to use a hardship withdrawal to fund my December purchase.

My questions are: (1) Have you ever taken a hardship withdrawal from your 401k to fund a down payment and closing costs? (2) Do you foresee any problems using the 401k hardship withdrawal to purchase both units of a duplex? (3) Is there anything you think is significant that I haven't considered on this deal? (4) Will the use of my 401k funds inhibit me from holding the entire property in an LLC?

One thing I didn’t mention above- I won’t be eligible to contribute to my 401k plan for 6 months after my hardship withdrawal, but I’ve stopped contributing to it anyhow after reading a half dozen Rich Dad Advisor Series books.

Thanks in advance

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