Your 403(b) plan is supposed to be your nest egg for retirement, but if you're trying to come up with enough cash for your dream home, it can sure look tempting. If you're not over 59 1/2, however, you might not be able to use your 403(b) plan for a mortgage down payment.
TL;DR (Too Long; Didn't Read)
As long as you are over the retirement age, 59 1/2, you can use a 403(b) retirement plan for a mortgage down payment.
Your 403(b) plan might offer loans, which would allow you to take out up to $50,000 or 50 percent of your vested account balance, whichever is smaller. However, there are two potential problems with using a loan. First, your 403(b) plan might not offer loans, in which case you're simply out of luck. Second, taking out a 403(b) plan loan could give your lender cold feet because of your additional debt repayment obligations, which would nix the mortgage -- obviously not the result you're looking for.
Leaving Your Employment
If you've left your job, you can take distributions from your 403(b) plan for any reason, including making a distribution to make your down payment. However, there's no early withdrawal penalty exception for buying a home, even a first home, so you'll owe a 10 percent penalty on top of the ordinary income taxes on the withdrawal. For example, if you take out $15,000 for your down payment, you owe income taxes on the $15,000 and a $1,500 early withdrawal penalty.
Understanding Hardship Withdrawals
Your plan might also allow for a hardship withdrawal if that's the only way you can make a down payment on your primary residence. For example, if your bank won't give you the mortgage if you take out a 403(b) plan loan, you could take out a hardship withdrawal, assuming your plan allows them, to make the down payment. However, like loans, your 403(b) plan has the discretion to permit or disallow them, so you might be out of luck. Plus, there's no exception to the early withdrawal penalty for a mortgage down payment, so plan to pay.
IRA Rollover Priority
If you've left your job and are purchasing a first home, consider rolling up to $10,000 of your 403(b) plan into an IRA first and then taking the distribution. Unlike 403(b) plans, IRAs let you take out up to $10,000 for a first home without paying a penalty. However, to qualify you can't have owned a home in the last two years. If you're married, your spouse also has to qualify. Unfortunately, this won't work if you're taking a hardship distribution, because those aren't eligible to be rolled over.
- IRS: Publication 4482
- IRS: Retirement Plans FAQs Regarding Loans
- IRS: Retirement Plans FAQs regarding Hardship Distributions
- IRS: Retirement Topics - Plan Loans
- IRS: Do’s and Don’ts of Hardship Distributions
- IRS: Hardships, Early Withdrawals and Loans
- IRS: Retirement Topics - Exceptions to Tax on Early Distributions
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."