My husband and I have jobs and rent a home. We have never owned a home. Our plan is to purchase a home that is not near our rented home. We will live in the rented home during the week, and go to the new home at all other times. I will file my taxes, have utilities and banking in the new home. We will retire to our new home in about six years. The problem is the plan administrator of our retirement plans will not let us take $10,000 each from our 401(k) plan for the down payment. The administrator says it isn't our primary home. However, it will be ours and not for rent. The purpose is to pay for a home while we still have these great jobs. How can I convince the 401(k) plan administrator to let us to make a withdrawal for the down payment?
"It's none of the plan administrator's business as to where you call your primary residence," said FPA member Mark Prendergast, CFP®, of Inspired Financial. "That is between you and the Internal Revenue Service (IRS). All you have to do is make the request and simply state: 'This is to purchase a primary residence.' If the plan administrator denies you this request, I believe that would be a violation of some Department of Labor regulations."
Of course, Prendergast also said that you should check with a qualified tax professional to get an opinion of what your primary residence would be — the rental or the new house. "It seems logical that if you used the new house for purposes of: a) voter registration, b) car registration, c) church or other social activities, and d) virtually all other bills, that you could consider it your primary residence," said Prendergast.
Other planners agreed that you might require the help of qualified professionals. FPA member Paul J. Bednarski, MBA, CFP®, CFS, CRPC, of Southern California Fiduciary Services, suggested that you first consider appealing to a higher authority in the company, such as the supervisor of the plan administrator. In addition, he suggested that you consult an independent professional third-party administrator and, as a last resort, hire a lawyer specializing in pension law — though this is an expensive option.
Other planners also noted that it's an area of some debate. "Most 401(k) plans are set up within the guidelines established by the IRS, so this is not a situation where you would need to change one person's mind," said FPA member K. Esther Szabo, CFP®, of Financial Planning Forum Inc. "The IRS does allow for hardship withdrawals, but only under very specific reasons, one being to purchase a primary residence. By what you wrote, this would not be a principal residence."
FPA member Jim Kirby, CFP®, of Kirby Wealth Management, also noted the importance of seeking legal help. He noted, for instance, that it's illegal for a plan administrator to discriminate in favor of highly compensated employees. He also noted that some 401(k) plans permit loans that are not secured or tied to a principal residence. "If you're plan permits that kind of loan that may be an easier approach," Kirby said.
Of note, you should read the documents associated with your employer's retirement plan.