Accepted Answer

Hello mavie,

There is never any allowed reason that your 401k withdrawals would be exempt from tax.

If you are under the age of 59-1/2, an early withdrawal penalty of 10% applies to any distribution you take from the plan. There are certain hardship withdrawals you can make which are exempt from paying this penalty, but the tax itself is never exempt, regardless of how the funds are used. That may be where you are thinking that an exception is allowed, but it would only apply to the early withdrawal penalty and not to the tax itself.

Hardship withdrawals where the early penalty will be waived include only the following:

You become totally disabled.

You are in debt for medical expenses that exceed 7.5 percent of your adjusted gross income.

You are required by court order to give the money to your divorced spouse, a child, or a dependent.

You are separated from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turn 55, or later.

You are separated from service and you have set-up a payment schedule to withdraw money in substantially equal amounts over the course of your life expectancy.

There are no exceptions to the early withdrawal penalty when the funds are being used for purchasing a home.

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Thank you mavie, and let me know if you have more questions. I am happy to help you with whatever I can.

Expert:	Merlo
Pos. Feedback:	99.9 %
Accepts:	7649
Answered:	7/15/2009

Accountant

25+ years tax consulting. Specializing in returns for US citizens living abroad