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R. Klein, EA
R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 3375
Experience:  Over 20 Years experience
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I purchased a condo in 2011. I paid $271,000 for the condo.

Customer Question

I purchased a condo in 2011. I paid $271,000 for the condo. At the same time I cashed in my 401k for $116,000 to cover the downpayment. $23,000 was withheld for taxes to cover this disbursement. Yet my taxes are showing a balance due of more than $5,000. I thought that if this disbursement money was used to purchase a first time home pirchase, we would be ok for our taxes. Please help.
Submitted: 5 years ago.
Category: Tax
Expert:  R. Klein, EA replied 5 years ago.

I understand you cashed out your 401k. The FULL amount of the distribution is subject to regular income tax as though it were wages.


In addition, if you are not yet 59.5 at the time of the distribution, the entire amount is subject to an additional 10% penalty for early distribution.


If this is a first-time purchase of a personal residence, there is a special exception to the penalty rule and that is $10K of the distribution is not subject to the 10% penalty (in other words you save $1,000 in penalty tax)


Likely that $23K (or 20%) is not enough to cover all the tax. Assuming this distribution keeps you still in the 15% tax bracket, your tax on the distribution is at least 25% (15% + 10% penalty rate) minus the $1000 exception.


ONLY the $10K is exempt from the penalty. This is reported on Form 5329.


There is no place to enter the purchase price of the home because it is irrelevant for the tax return.