I have a customer that pulled 60k from 401k to purchase a house. This is not their first home. They were under the understanding they could pull the 60k and not be taxed. Am I missing something?
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You aren’t missing anything but they were. It’s taxable
If it was a first time home?
If the employer plan allows loans against the 401k - I believe they can use it for whatever they choose. It has to be a loan not a withdrawal. Employee is required to make payments on amount borrowed.
Edit: client wouldn't have received 1099-R if it was a loan
This was not a loan it was a direct withdrawal. I knew loans were not taxable and I would only have a form if they left employment. This is a direct withdrawal from 401K and only paid 10% in taxes. They will be sorely disappointed.
If theyd rolled it to an IRA, then taken it from the IRA, they could have waived the penalty on the first 10K, but that's the only break they woould have gotten....no break on the penalty when its from a 401k.
Even if it is a loan if the employee leaves the company before it is paid off then they have taxable income because at that time it is considered a distribution and not a loan.
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Agree with that statement @rcooley25 sounds like in this case the client could've saved tax and penalties if they had taken a 401k loan instead of distribution Expensive lesson for them
@judys3 wrote:
from 401k to purchase a house ... They were under the understanding they could pull the 60k and not be taxed.
Some taxpayers misunderstand what a "hardship withdrawal" means. In most cases, a taxpayer can't withdraw from their 401(k) through their employer unless it is a "hardship withdrawal". Purchasing a principal residence qualifies as a "hardship withdrawal", which allows the taxpayer to withdraw money.
But they misunderstand that a "hardship withdrawal" does not change the fact it is taxable and potentially subject to the 10% penalty.
Another piece of information to share with you. Today should be my 20th birthday. But my mother did not give birth to me for over 12 hours more so tommorrow (03/01/24) I turn 80.
May I be the first here to wish you a happy birthday!!!!!!
As far as birthdays go, out of our graduating class of 120+ kids I only remember my own birthday and one class member. In 1972 our February school newspaper listed the kids having birthdays for the month of February. They also mentioned a classmate named Leonard by pointing out that he wasn't getting a birthday that year. So while I am at it - Happy birthday Leonard F.!
Several years ago, we took somebody out to go "bar hopping" to celebrate her 21st birthday. But she was born on February 29th, so she was actually 84 years old. 😀
Just a note on what the IRS considers " first time " If you haven't bought a home in last two years the IRS considers it first time.
@Terry53029 it's has not "owned" there is a difference between owned and bought
@dkh The actual meaning is in IRS Code 72(t)(2)(F) and the meaning of first time home buyer in that code is "Qualified first-time homebuyer distributions For purposes of paragraph (2)(F)— (A) In general The term “qualified first-time homebuyer distribution” means any payment or distribution received by an individual to the extent such payment or distribution is used by the individual before the close of the 120th day after the day on which such payment or distribution is received to pay qualified acquisition costs with respect to a principal residence"
That's not the definition of "Qualified first-time homebuyer" . That's the definition of Qualified first-time homebuyer distributions that qualify for penalty waiver
A. Taxpayers who have not owned another principal residence at any time during the three years prior to the date of purchase are considered first-time homebuyers.
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