Welcome back! Ask questions, get answers, and join our large community of tax professionals.
cancel
Showing results for 
Search instead for 
Did you mean: 

Buying a house with 401K

judys3
Level 5

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?

0 Cheers
1 Best Answer

Accepted Solutions
IRonMaN
Level 15

You aren’t missing anything but they were.  It’s taxable


Slava Ukraini!

View solution in original post

22 Comments 22
IRonMaN
Level 15

You aren’t missing anything but they were.  It’s taxable


Slava Ukraini!
dkh
Level 15

Wouldn't have been taxable if they'd taken it out as a loan from the 401k

 

judys3
Level 5

If it was a first time home? 

0 Cheers
IRonMaN
Level 15

Still taxable 


Slava Ukraini!
dkh
Level 15

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 

judys3
Level 5

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.

0 Cheers
Just-Lisa-Now-
Level 15
Level 15

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.


♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪
dkh
Level 15

Well now they know they should've consulted you about the taxability of the withdrawal. 

Who did they get the bad advice from ?    

judys3
Level 5

Maybe Google.  

rcooley25
Level 11

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.

dkh
Level 15

Wouldn't have gotten $10k break from the IRA - it wasn't first time home purchase

IRonMaN
Level 15

Did Google also say Intuit was giving away free Fireball today?  Why else would our good friend @rcooley25  pay us a visit? 😜


Slava Ukraini!
dkh
Level 15

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

TaxGuyBill
Level 15

@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.

rcooley25
Level 11

And I will be very happyt to share it with all of you.

rcooley25
Level 11

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.

IRonMaN
Level 15

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.!


Slava Ukraini!
TaxGuyBill
Level 15

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.  😀

Terry53029
Level 14
Level 14

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.

0 Cheers
dkh
Level 15

@Terry53029    it's has not "owned"       there is a difference between owned and bought

 

Terry53029
Level 14
Level 14

@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"

0 Cheers
dkh
Level 15

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 

Q. Who is considered to be a first-time homebuyer?

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.

 

0 Cheers