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Barbara
Barbara, Enrolled Agent
Category: Tax
Satisfied Customers: 3353
Experience:  18+ years of experience in tax preparation; 25+ years of experience as a real estate/corporate paralegal.
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Can I ask for a hardship withdrawal for building addition to

Customer Question

Can I ask for a hardship withdrawal for building addition to parents house? My wife and I have no other financial means to live. We are on one income and rent eats away at most of that income. The in laws offered to let us move in if we can come up with cash to build an addition. We have taken out all other 401k loans and withdrawals, but still need additional cash.
Submitted: 11 months ago.
Category: Tax
Expert:  Barbara replied 11 months ago.

Welcome to Just Answer. My name is ***** ***** I will be happy to assist you.

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.

Whether a need is immediate and heavy depends on the facts and circumstances. Certain expenses are deemed to be immediate and heavy, including: (1) certain medical expenses; (2) costs relating to the purchase of a principal residence; (3) tuition and related educational fees and expenses; (4) payments necessary to prevent eviction from, or foreclosure on, a principal residence; (5) burial or funeral expenses; and (6) certain expenses for the repair of damage to the employee's principal residence. Expenses for the purchase of a boat or television would generally not qualify for a hardship distribution. A financial need may be immediate and heavy even if it was reasonably foreseeable or voluntarily incurred by the employee.
(Reg. §1.401(k)-1(d)(3)(iii))

A distribution is not considered necessary to satisfy an immediate and heavy financial need of an employee if the employee has other resources available to meet the need, including assets of the employee's spouse and minor children. Whether other resources are available is determined based on facts and circumstances. Thus, for example, a vacation home owned by the employee and the employee's spouse generally is considered a resource of the employee, while property held for the employee's child under an irrevocable trust or under the Uniform Gifts to Minors Act is not considered a resource of the employee. (Reg. §1.401(k)-1(d)(3)(iv)(B))

A distribution is deemed necessary to satisfy an immediate and heavy financial need of an employee if: (1) the employee has obtained all other currently available distributions and loans under the plan and all other plans maintained by the employer; and (2) the employee is prohibited, under the terms of the plan or an otherwise legally enforceable agreement, 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))

The following IRS link contains excellent information which you will find helpful:

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-hardship-distributions

Please let me know if I can assist you further.

Thank you and best regards,

Barb

Customer: replied 11 months ago.
I need to know if paying to build an addition to a house owned by my in laws for us to live is a valid hardship? We cannot afford rent or a mortgage and only option is to build an addition on parents property.
Expert:  Barbara replied 11 months ago.

I understand what you're saying, and the criteria is that there must be an immediate and heavy financial need to qualify for a hardship withdrawal, and you must not have other assets to meet the financial need.

Based on the information you have provided, it appears you would qualify for the hardship withdrawal.

Best regards,

Barb

Customer: replied 11 months ago.
Is there any risk to my in laws for us to pay for the addition that way?
Expert:  Barbara replied 11 months ago.

There is no risk to your in laws, tax wise.

However, adding an addition to their house may cause a reassessment for property tax purposes.

Expert:  Barbara replied 11 months ago.

Just following up with you to see if you have any other questions or concerns. If so, please let me know, and I will be happy to assist you further.

Best regards,

Barb