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Tax.appeal.168
Tax.appeal.168, Tax Accountant
Category: Tax
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Experience:  3+ decades of varied tax industry exp. Tax Biz owner
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Can I withdraw from my 401K for a first-time home purchase?

Customer Question

Can I withdraw money from my 401k for a first-time home purchase? I am a first-time home buyer. Not a loan, but a withdrawal. How much can I take out? How much will be taxed? What is the penalty or fee for doing so?

Submitted: 4 years ago.
Category: Tax
Expert:  Tax.appeal.168 replied 4 years ago.

In brief, you can take the withdrawal. Normally if you are not the age of 59-1/2 at the time of the withdrawal, a 10% penalty early withdrawal penalty would apply, but as you are a first-time homebuyer, and the money will be used as a down payment, you will meet an exception, the 10% penalty will not apply. If this is a traditional 401k plan, the amount withdrawn will be taxed as ordinary income. You are allowed to take $10,000 for the first-time homebuyer exception.

Please let me know if I can be of further assistance to you regarding this matter.

Customer: replied 4 years ago.

Can I take more than 10K out? What if I wanted to take out 30K? Also, if I only took out 10k, would I have to roll that into a Roth IRA first or is that not necessary? Please advise as I was under the impression that I could take up to 10k out and with no penalty for doing so, that it would be taxed as ordinary income, but that I first had to roll it over into a Roth IRA.

Expert:  Tax.appeal.168 replied 4 years ago.

No, the $10,000 does not have to be rolled over into a Roth IRA first. You can take out as much as you like, however, only $10,000 of that amount will meet the exception. Example, you want to take out $30,000, if you are not age 59-1/2 at the time of withdrawal, a 10% early withdrawal penalty will apply on the additional $20,000. In order for the 10% penalty to not be applied towards the $10,000, you will need to complete a Form 5329. The exception is not granted automatically.

Link to Form 5329/instructions:

http://www.irs.gov/pub/irs-pdf/f5329.pdf
http://www.irs.gov/pub/irs-pdf/i5329.pdf

Expert:  Bill replied 4 years ago.

Another expert here.

First, you can only take a withdrawal from the 401(k) if the provisions of the plan permit a withdrawal (such as hardship withdrawals or in-service withdrawals). If the plan does not permit these types of withdrawals and you are still employed with the employer sponsoring the plan, then you will not be able to take a distribution.

Second, the exception to the 10% penalty tax for a first-time home purchase does not apply to distributions from a 401(k) (this exception is only available for withdrawals from IRAs). See this IRS link - http://www.irs.gov/taxtopics/tc558.html

Customer: replied 4 years ago.

So, what if I wanted to pull out 20K from my 401K to use on for a first-time home purchase? explain how I would go about doing that? Would I have to first roll it all over into a Roth IRA? I was told that for a first-time home buyer I could pull up to 10k out without penalty, but it would be taxed as regular income. The additional 10k I wanted would be subject to the 10% penalty fee plus the taxes as it is treated as income. Please help.

Expert:  Tax.appeal.168 replied 4 years ago.

Original expert here.

Before I jumped back in, I wanted to give the other expert an opportunity to respond. He is correct that the 10% exception for first time homebuyer DOES NOT apply with 401k withdrawals, which means that if your plan administrator allows you to take the withdrawal, the 10% will apply in addition to the withdrawal amount being taxed as ordinary income. Regarding rolling it over to an IRA...see below:

Distributions that are not taxable, such as distributions that you roll over to another qualified retirement plan or a distribution of your designated Roth IRA contributions are NOT subject to this 10% additional tax. This means that if you roll over an amount...NOT take a distribution, the 10% additional tax will not apply. If you take a distribution, the additional 10% tax will apply. If your 401K plan allows you to take the withdrawal, you need to request the proper paperwork from your plan administrator, and request the amount that you want to withdraw. The link that the previous expert will provide more detailed information. Here it is again: http://www.irs.gov/taxtopics/tc558.html. You may also want to refer to IRS Topic 413 regarding rollovers.

http://www.irs.gov/taxtopics/tc413.html

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Please let me know if I can be of further assistance to you regarding this matter.

Customer: replied 4 years ago.

Okay, so if I wanted to take out 30k from my 401k, assuming that my plan allows me to do so, then I would pay a 10% penalty of 3000, plus pay taxes on 30K as income. Is this correct? And, is there any restriction on how much money I can pull out. Please advise.

Expert:  Tax.appeal.168 replied 4 years ago.

Q: Okay, so if I wanted to take out 30k from my 401k, assuming that my plan allows me to do so, then I would pay a 10% penalty of 3000, plus pay taxes on 30K as income. Is this correct?

A: This is correct.

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Q: And, is there any restriction on how much money I can pull out.

A: You will need to check with your plan administrator to find out what the maximum amount is that they will allow you to withdraw. There is a maximum amount of contributions that can be made to a 401k, but as for the distribution amount, if allowed, this would be the based on the rules of the plan that you have. The plan administrator should be able to answer this question for you.