Please Don't Rob Yourself to Buy a Home! Retirement Account Loans

Real Estate Agent with RVA HomePRO Realtor with Keller Williams serving Hanover, Henrico, Chesterfiled and Richmond, Virginia 0225205023

robberWith the changes in lending that have occurred recently there are some lenders out there who are farming their contacts encouraging people to buy homes and get the minimal down payments necessary by withdrawing money from their retirement accounts under the "hardship allowance" some retirement plans offer. When someone reccomends this they sell it as you're just, "borrowing from yourself" and you are paying back yourself with interest. It's great to be your own bank isn't it? Well maybe and maybe not...

From the IRS:

1. Under what circumstances can a participant get a hardship distribution from a retirement plan?

A retirement plan may, but is not required to, provide for hardship distributions. Many plans that provide for elective deferrals provide for hardship distributions. Thus, 401(k) plans, 403(b) plans, and 457(b) plans may permit hardship distributions.

If a 401(k) plan provides for hardship distributions, it must provide the specific criteria used to make the determination of hardship. Thus, for example, a plan may provide that a distribution can be made only for medical or funeral expenses, but not for the purchase of a principal residence or for payment of tuition and education expenses. In determining the existence of a need and of the amount necessary to meet the need, the plan must specify and apply nondiscriminatory and objective standards.
(Reg. §1.401(k)-1(d)(3)(i))

If your 401(k) plan made hardship distributions that didn’t follow the plan language, or if your plan doesn’t have hardship language, find out how you can correct this mistake.

The rules for hardship distributions from 403(b) plans are similar to those for hardship distributions from 401(k) plans.

If a 457(b) plan provides for hardship distributions, it must contain specific language defining what constitutes a distribution on account of an "unforeseeable emergency."
(Reg. § 1.457-6(c)(2))


In other words your specific plan MAY or MAY NOT allow a hardship distribution, it all depends on the regulations of the specific plan from your employer. It's important to check the documentation for your individual plan. So if your plan offers this feature then it's a great thing right? Well also consider this from the same IRS FAQ site:

5. What are the consequences of taking a hardship distribution of elective contributions from a 401(k) plan?

After an employee receives a hardship distribution of elective contributions from his or her 401(k) plan, generally the employee will be prohibited from making elective contributions and employee contributions to the plan and all other plans maintained by the employer for at least 6 months after receipt of the hardship distribution. (Reg. §1.401(k)-1(d)(3)(iv)(E)(2))

Hardship distributions are includible in gross income unless they consist of designated Roth contributions. In addition, they may be subject to an additional tax on early distributions of elective contributions. Unlike loans, hardship distributions are not repaid to the plan. Thus, a hardship distribution permanently reduces the employee's account balance under the plan.

A hardship distribution cannot be rolled over into an IRA or another qualified plan.
(Code § 402(c)(4))

So once you take a hardship distribution you cannot make any contributions into that plan, or any other retirement plan, for six months or until the distribution is repaid, which ever is later. Your retirement savings is now put on hold for a minimum of six months. Not as sweet of a plan any more is it? There's one more thing to seriously consider when looking at this option to get the money you need to purchase a home...

spiral clockSince each plan is governed by individual employer the account must be made whole before you leave that employer, otherwise the hardship distribution, aka loan, must be repaid before you leave. Leaving your employment can be either voluntary - leaving for a new or better paying job, or leaving involuntarily - being fired, down sized, or location closure. If the loan is not repaid before you leave your employer it is treated as an unqualified distribution, added to your annual income and then subject to your normal income tax rate plus a 10% penality. 

To avoid this issue you will need to pay back the loan before you leave which ofen means borrowing from somewhere else - a personal loan, home equity loan, friend/family member loan, etc. Can you start to see the downward spiral you can get yourself into?

"Borrowing from yourself" isn't sounding so rosey any more is it? Please confirm all this with your local tax professional, but I want you to have the information to ask the right questions when you are considering using these special provisions. It's likely better to consider other avenues to get the funds you need to buy that deam home and not turn it into a nightmare.

Posted by
RVA Home Pro
Michael Hottman As a Licensed Real Estate Agent in Virginia and a Licensed Professional Counselor in Virginia I strive to help others achieve their goals in life, whether it's selling or buying a property or becoming the person they were meant to be.

My background includes a Bachelor of Architecture from Virginia Tech and a Master of Science in Rehabilitation Counseling from Virginia Commonwealth University (VCU), managing residential properties, graphic design, corporate information technology, and being a third generation Realtor®. My experience in real estate started when I was old enough to help my dad clean out rental properties and I have started taking my son on showing appointments already.

My goal is to always provide my clients with 5 STAR service from the time I meet them to far beyond the close of their initial transaction, making them clients for all the real estate transactions they may ever have.


Keller Williams
6600 W. Broad Street
Richmond, VA 23230


While the information in this blog post is thought to be accurate and reliable on the date it is posted, it is provided on an “as is” basis and without warranty of any kind, either express or implied and is given for educational and informational purposes only. The contents of this article should not be considered as theraputic, legal, accounting, or other advice. For a comprehensive consultation regaring your personal situation please consult a competent professional in the appropriate field.


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Comments (23)

Roy Kelley
Realty Group Referrals - Gaithersburg, MD

This is a great topic for a series of blogs.

Withdrawing money from retirement accounts is not usually a good idea.  

Feb 01, 2015 11:24 PM
Jon Kolsky
Kolsky Realty & Management - Long Beach, CA
Licensed California Real Estate Broker

RVA HomePRO Michael Hottman ~ Michael, awesome post! "We have to be careful what we do, especially the older we get

Feb 02, 2015 09:00 AM
Lou Ludwig
Ludwig & Associates - Boca Raton, FL
Designations Earned CRB, CRS, CIPS, GRI, SRES, TRC


Thought provoking post . . . . thanks for sharing your insight on the topic.

Good luck and success.

Lou Ludwig

Feb 02, 2015 11:28 AM
Jeanne Gregory
RE/MAX Southwest - Sugar Land, TX
The most important home I sell is YOURS!

I received my yearly Social Security statement yesterday.  I saw the amounts that I would be eligible to draw at 62, 66 and 70.  No way I'm robbing a SEP IRA or 401K.  I'm gonna need all the income I can get!  Social Insecurity is not going to support my lifestyle.

Feb 04, 2015 09:20 AM
Laura Cerrano
Feng Shui Manhattan Long Island - Locust Valley, NY
Certified Feng Shui Expert, Speaker & Researcher

Robbing Peter the banker to pay Paul the real estate agent is not the way to go in any situation in all my years.

Feb 04, 2015 12:05 PM
Laura Cerrano
Feng Shui Manhattan Long Island - Locust Valley, NY
Certified Feng Shui Expert, Speaker & Researcher

The only reason to borrow would be a life or death emergency—and even that has to be sorted through mentally, if not just generally.

Feb 04, 2015 12:07 PM
Praful Thakkar
LAER Realty Partners - Andover, MA
Andover, MA: Andover Luxury Homes For Sale

RVA HomePRO Michael Hottman - a few borrowers of mine used 401K money as a loan towards down payment - however, that's too early in their life and I am sure, they'll not have to worry about it as they'd repay it soon.   

Feb 04, 2015 12:21 PM
Joan Whitebook
BHG The Masiello Group - Nashua, NH
Consumer Focused Real Estate Services

What a timely post.  I recently have had 2 buyer use hardship to fund the purchase of a principal residence.  Hopefully, they weighed the pros and cons of using the hardship.

Feb 04, 2015 12:49 PM
Debbie Gartner
The Flooring Girl - White Plains, NY
The Flooring Girl & Blog Stylist -Dynamo Marketers

Yes, this can be risky in many ways, so I think it's better to avoid when possible.

Feb 04, 2015 06:37 PM
Sham Reddy CRS
H E R Realty, Dayton, OH - Dayton, OH

Thanks for bringing up such an important subject.  Only accountants and attorneys might understand all that mumbo jumbo.  I have had buyers take money from their plans to purchase their primary residence. Its upto to them and their accounting pros or employers try to follow all that complicated IRS or retirement account rules

Feb 04, 2015 07:31 PM
Andrew Mooers | 207.532.6573
Northern Maine Real Estate-Aroostook County Broker

Excellent news and you see it happen a lot!

Feb 04, 2015 07:55 PM
Kat Palmiotti
406-270-3667,, Broker, eXp Realty - Kalispell, MT
Helping your Montana dreams take root

Yes, it's so important to know exactly what the ramifications are before ever touching a retirement account.  Great tips.

Feb 04, 2015 08:28 PM
Nina Hollander, Broker
Coldwell Banker Realty - Charlotte, NC
Your Greater Charlotte Realtor

Michael... excellent topic and one that is not easily understood by many. Hopefully, your information will keep people from making rash decisions that cost them some financial security down the line.

Feb 04, 2015 09:32 PM
Rob Spinosa
Guaranteed Rate, Marin County, CA - San Anselmo, CA
SVP of Mortgage Lending, Marin County

This is SUCH a loaded topic that all I can really comment on here is a "thank you" for bringing it up and opening the discourse.  I do see more and more borrowers inclined to access retirement funds to purchase, and whether it's right or wrong, or good or bad, is highly dependent on the situation.  One thing is certain --- it's not a decision to be made lightly.

Feb 04, 2015 11:21 PM
Mary Weiss
Zillow Group Mortgages - Seattle, WA
Trainer & Content Manager

My 401k plan allows for me to take an actual loan out of my money, but only for less than half of the total amount there. It's paid back with additional payroll deductions after taxes. It sounds great... but! While we have a choice to continue with our normal contributions during the loan repayment period, it's always a good idea to do so, but there's the added expense of now paying it back out of take-home pay...  Plus, all that time value lost in those investments! That could mean thousands of dollars.  I think it should be a requirement for prospective homeowners to take a class on personal finance before attempting to get a loan. Any lenders out there offering classes already?  

Feb 05, 2015 05:38 AM
RVA HomePRO Michael Hottman
RVA HomePRO Realtor with Keller Williams serving Hanover, Henrico, Chesterfiled and Richmond, Virginia - Glen Allen, VA
Helping you achieve goals in life & real estate

Bob Ratliff, Broker Associate - REALTOR® 512-587-5689 - When I hear lenders farming their contacts with something like this I feel like they are more concerned with closing another deal rather than really looking out for their clients. I know sometimes I cost myself sales sometimes when I present info like this, but I also think I build trust with my clients.


Roy Kelley - I agree and would say ONLY withdraw from a retirement account if it's a life and death situation - medical treatment or something similar. Buying a home is not life and death.


Jon Kolsky and Lou Ludwig   Thanks for the kind words. Retirement accounts are not to access when we want something new, they are for retirement. That's why they have lots of restrictions.

Laura Cerrano - Yes robbing yourself now will likely really hurt yourself in the future.

Feb 05, 2015 05:57 AM
RVA HomePRO Michael Hottman
RVA HomePRO Realtor with Keller Williams serving Hanover, Henrico, Chesterfiled and Richmond, Virginia - Glen Allen, VA
Helping you achieve goals in life & real estate

Praful Thakkar - I do hope they are disciplined enough to put their loan back in quickly. If not, they could face some significant penalities.

Joan Whitebook - I hope so too. I hope they got input not just from the loan officer, but from a tax professional.

Debbie Gartner - I strongly believe the risk outweighs the benefits. If you really want to purchase a home, save for the down payment or use a low down payment product, don't rob yourself.

Sham Reddy - Attorneys and CPAs are the best to answer these tax questions, but sometimes people don't know the questions to ask. That was my goal with this post.

Rob Spinosa - I don't think it's loaded, but it does require more investigation by a consumer which the loan person may or may not encourage. I don't think many of the loan officers really understand what they are asking their client to consider when they offer this as a way to buy a home. It would not sit well with me if I didn't explain some of the ramifications and strongly encourage clients to seek other professional input. I'd probably have my clients sign something saying I encouraged them to seek tax advice from a professional to cover me.

Feb 05, 2015 06:07 AM
Russ Ravary ~ Metro Detroit Realtor call (248) 310-6239
Real Estate One - Commerce, MI
Michigan homes for sale ~

I am noticing that many older buyers are borrowing against their 401K and taking money out their retirement accounts.

Feb 05, 2015 10:22 AM
Paul S. Henderson, REALTOR®, CRS
Fathom Realty Washington LLC - Tacoma, WA
South Puget Sound Washington Agent/Broker!

I leave it to my client and their financial expert! I would never recommend something that is out of area of expertise RVA HomePRO Michael Hottman...

Feb 12, 2015 02:25 PM
Georgie Hunter R(S) 58089
Hawai'i Life Real Estate Brokers - Haiku, HI
Maui Real Estate sales and lifestyle info

Well so much for that theory! I have never known a client who would even consider this option.

Feb 18, 2015 10:52 AM