What are the tax ramifications of pulling out my 401k for a home purchase?

Question

I am considering buying a house that I would immediately have to build on to. I have about $64k in equity on my current home, but if that is not enough I am considering taking $20k out of my 401k to supplement the building costs. If I do this how stiffly will I be penalized by the IRS for withdrawing the money?

jerryguy I would give your rhyme about a 7 out of 10. You scored that high because you incorporated the 20k and the buying a "crib" in it, which I appreciated. It was a little awkward though.

Answer 1

You can take a one time "loan" from your 401 without penalty. However. you must pay it all back through your current place of employment.

I took a loan out on mine and had 5 ? years to pay it back. However, when I changed jobs I could no longer pay the loan back. Don't know why but I couldn't.

The IRS just added the remaining part of the loan to my income and based my taxes as usual. Of course I didn't pay any taxes on the additional "income" so for the only time in my life I owed the government money at tax time.

The loan was for $8,000 and the extra taxes I had to pay was about $1800 - $2000 dollars.

Answer 2

I'm glad you like the house, and hope you saved some of the 401K money for taxes, or had a lot withheld. You'll pay income tax on the full amount of the withdrawal. That depends on your tax bracket, but I'd guess that's at least 25% with the 401K money included, or maybe more - so you'll owe $25,000 or more in income tax - could be as much as $33K but probably not In addition, if you are under age 59-1/2, you'll pay a 10% penalty, so that's another $10k S0 the tax you'll owe is probably around $35-38k for the withdrawal, possibly more. Anything withheld when you got the money for income tax will apply to that.

Answer 3

While I believe that would be a foolish mistake, the 401K plan that you are in has some pretty specific rules.

If you requested $20K, the first thing that would come out is the 10% penalty for early withdrawl. That would knock your starting point down to $18K. You would then be required to pay the taxes on the money that you took out of your plan. Let's say you are in the 25% bracket. That would knock your net down to $13,000. That means you would lose 33¢ out of every dollar that you take out.

In addition, your plan might have a rule that says you can't contribute to your plan for 6 months to a year after you take a withdrawal.

With all the facts in your hand, hopefully you can see that screwing up your retirement years for a temporary purchase is not a good idea.

Answer 4

You'd pay income tax on the amount you pull out as regular income, plus a 10% penalty on the amount you withdrew if you are under 59-1/2.

The ability to withdraw money and pay just the taxes, not the penalty, applies only to IRA's, not to 401K's.

Answer 5

If it is your first home, you may withdraw $10,000 without any penalty, but it is subject to your regular income tax rate. The second $10,000 is subject to a 10% penaly and your regular tax rate. (You may end up netting only 14,000 after penalty and taxes).
I suggest you go to your 401K administrator, and ask if there is a loan program. In this case you actually lend yourself the money from your 401k program. then your contributions every week go to paying yourself back, with interest. The only disadvantage of these programs is that the employer contribution stops until the loan is repaid. However, you get the money tax deferred.

Answer 6

The $20K will be taxed as regular income. Plus you'll have to pay 10% on top of the regular income tax.

Answer 7

For your first time home, if you take up to $10,000 from your IRA, and meet certain conditions, then you don't pay 10% penalty. Your spouce can also take out $10,000 from the IRA.

You should read page 51 of publication 590: Individual Retirement Arrangements (IRAs) at
http://www.irs.gov