Can I Use a 403(b) Retirement for a Mortgage Down Payment?

by Mark Kennan

    Scraping together enough money for a home down payment can be challenging, especially if you're moving to a larger home or haven't built up much equity in your prior home. However, you might be able to tap your 403(b) plan for some of the money -- just don't expect any special tax treatment from Uncle Sam.

    Qualified Withdrawals

    If you're over 59 1/2 years old, you can get as much money out of your 403(b) plan as you want, whether it's to make a mortgage down payment or for a down payment on a new car. See, when you hit that magical age of 59 1/2, you can take qualified distributions from your 403(b) plan, so you won't owe any early withdrawal penalties. But, you will still owe income taxes on the distribution.

    Hardship Withdrawals

    If you're under 59 1/2, you might not be able get the money out of your 403(b) plan at all if you're still working for the same employer -- unless your employer allows hardship withdrawals from the plan for mortgage down payments. However, you're only allowed to take a hardship distribution if you have no other way to pay for the down payment. For example, if you could take out a loan, you wouldn't be able to take a hardship distribution. But, if a loan would disqualify you from your mortgage, you can take a hardship distribution.

    Penalties

    Just because you qualify for a hardship withdrawal doesn't mean you're going to get out of early withdrawal penalties. There's no exception for distributions taken from your 403(b) plan for a mortgage, even if it's your primary residence or even your first home. So, not only do you owe income taxes on the hardship withdrawal, you also get slapped with an extra 10 percent tax penalty. For example, if you're in the 28 percent tax bracket and you take a $20,000 hardship distribution, you'll pay $5,600 in taxes and $2,000 in early withdrawal penalties.

    Loans

    Your plan might also offer you the opportunity to take out a loan from your plan. You can borrow up to $50,000 or half your vested account balance, whichever is less. Typically, loans require repayment over five years, but when you use the proceeds for your down payment on your main home, you can take longer. Plus, the interest you pay goes back into your 403(b) account. The downside is that if you fail to repay the loan, it counts as a permanent distribution.

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    About the Author

    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."

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