401(k) withdrawal for 1st time home purchase?
Are there any provisions for taking money out of a 401(k) for a 1st time home purchase and avoiding the penalties.
Are there any provisions for taking money out of a 401(k) for a 1st time home purchase and avoiding the penalties.
Permalink Submitted by Alan Spross on Thu, 2009-08-06 21:04
No, the penalty exception only applies to IRA distributions, not distributions from employer plans. Many taxpayers believe that the exception applies to 401k plans as well, and are unpleasantly surprised when filing their taxes.
However, many 401k plans provide for loans from the plan, which could be used to fund a home purchase. The loan funds are not treated as taxable distributions unless the loan defaults, so there is no income tax or penalty in the meantime. Repayments including interest are done from after tax money.
Permalink Submitted by mk foss on Fri, 2009-08-07 17:02
When an employee does not qualify for a employee loan as Alan suggested, it’s possible to take a hardship withdrawal from a 401(k) plan for a home purchase. This route does not avoid penalties at all. The withdrawal is fully taxable, subject to the 10% penalty and restricts the employees ability to make further 401(k) deferrals for a while. The only advantage it has over a loan is that it need not be repaid – but that’s hardly an advantage when you’ve lost some retirement benefits.