If I take loan to from 403b to buy first house, if I default, can penalty be waived since I bought first house? My plan allows for withdrawal to buy first house.

[suzi63]

My plan allows withdrawals without penalty if I buy my first house. Since I took it as loan first & then defaulted, can I still waive the penalty since I bought first house? If so, what tax forms would I need to fill out & how would I show that on my tax return form?

[Opus 17]

No.  There is no homebuyer penalty exemption for a 403b, only an IRA.  

[suzi63]

This is the information I received: Any time you take money out of your 403(b) plan, you owe taxes on the distribution. Plus, if you're under 59 1/2 years old, you owe an extra 10 percent penalty on top of the taxes. Unfortunately, just because you're taking a hardship withdrawal doesn't mean you get out of the penalty. And, since there's no specific exception for buying a home, that means you're stuck paying it. So if you took out $15,000, you include an extra $15,000 in taxable income on your annual tax return, and you also pay a $1,500 penalty. The one exception is if you're a first-time homebuyer. The IRS does not impose the 10 percent tax penalty on first-time homebuyers – and the definition includes those who have not owned a main home during the past two years. If you fall into this category, you'll simply pay taxes on the distribution.

[suzi63]

The last 3 sentences are what I meant to paste.

[Opus 17]

Your source is incorrect.  The homebuyer exception applies to IRA funds ONLY, and not other qualified plans like 401k and 403b. <a rel="nofollow" target="_blank" href="https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distri...>

[Carl]

Also, there is a difference between a loan and a withdrawal. For a traditional IRA you can withdraw up to $10,000 for the purchase of your first home. You will still pay taxes on that $10K, but the 10% early withdrawal penalty will be forgiven. However, there is no such provision for a 403(b). If you withdraw from a 403(b) and are not of retirement age yet, you will pay taxes on that withdrawal, as well as the 10% early withdrawal fee.

If you take out a loan against your 403(b) you need to be aware of the $EXPENSIVE$ consequences of defaulting on the loan. So talk to your plan administrator about this to get the facts based on the rules that apply to your specific plan.

[biztaxlady1]

If you're over 59 1/2 years old, you can get as much money out of your 403(b) plan as you want, including to make a mortgage down payment. 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.

You could take a hardship distribution.  But that only applies if you have no other way to pay for the down payment.  But consider, 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.

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, you will owe income taxes on the hardship withdrawal/distribution. 

Your plan might 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 or default, it counts as a permanent distribution. 

See IRS for loan limitations and repayment requirements your administrator and you should be aware of:  https://www.irs.gov/retirement-plans/403b-plan-fix-it-guide-you-havent-limited-loan-amounts-and-enfo...