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I just asked Vanguard and they checked my withdrawal availability:

Either Hardship withdrawal may only be taken for the following purposes:

  • Purchase of a primary residence.
  • Prevention of eviction from or foreclosure on a primary residence.
  • Higher education costs for you, your spouse, or your dependents.
  • Medical expenses not covered by insurance for you, your spouse, or your dependents.
  • Funeral and burial expenses for your spouse or your dependents.
  • Repair of a primary residence for damage caused by a sudden or unusual event, such as a hurricane, tornado, or other natural disaster.

Please be aware that a $100.00 fee will be charged to your account upon taking either Hardship withdrawal.

So my question is this: I recently moved into another state and plan to purchase a home here. In my old state, we have a house that has now become our rental property. So the new property that we will be purchasing will be our primary residence. In this case, does it qualify for the 401K hardship withdrawal?

  • A much better bet is to take a loan from your 401K. This is sometimes allowed, and if done right can end up with you being able to put more money into your 401K. – DJClayworth Feb 8 at 1:03
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It should, since it will be your primary residence, but keep in mind:

  • You will need to pay tax on the withdrawal (and possibly a 10% penalty), and it may push you into a new tax bracket. If you're in the 22% tax bracket you need to take out 128% of when you need in order to cover the tax (or pay the tax out of cash on hand). If there's a 10% penalty on top of that, you'd need to withdraw 147%.
  • You will miss out the future earnings of the amount you withdraw, which could be hundreds of thousands of dollars in opportunity cost.

My personal opinion is that if you need to cash in a retirement account to buy the new house then you can't afford to keep the old house as a rental. Would you cash in your retirement to buy a rental in another state if you didn't already own it?

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    "the hardship avoids the 10% penalty" [citation needed, every source I find says the opposite] – Ben Voigt Feb 7 at 20:28
  • @BenVoigt Looking further I think you're correct. I must have been thinking of qualified IRA withdrawals. I've updated my answer. – D Stanley Feb 7 at 21:10
  • Yeah, I know American people are always saying "if you cannot afford a house, just rent.". We came from a culture that values home more than retirement savings. To us, if we have to pay $25000 on rental a year, it sounds like we are throwing money into a black hole. So we always purchase a home if possible. Because in our culture retirement does not really require that much money - considering the retirement ages are increasing, we may still have to work over 30 years until retirement. And keeping a rental property actually helps us to get more loan as possible. – fhcat Feb 7 at 22:16
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    @fhcat If you end up retiring in America, you may be in for a rude awakening. Retirement is definitely not cheap here. My father had a decent government pension and social security, which were not nearly enough to support his lifestyle. He burned through most of modest retirement savings within 2 years of retirement and he would have run out of savings within another year and a half, requiring major lifestyle changes, had he lived longer. – Eric Feb 7 at 23:39
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    @fhcat Realistically paying money for rent is no more "throwing money into a black hole" than paying mortgage interest. More to the point you are trying to own two homes. That is a statement by you that you think owning a rental home will give you a better rate of return than a 401K. You should definitely do the math carefully, taking into account everything said in the answers before you decide that. It's not like you need two homes to live in. – DJClayworth Feb 8 at 4:11

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