I am a first-time home buyer. If I take a distribution from my 401(k) to purchase land and a house, will I have to pay a penalty on this distribution? Also, what kind of form will I need to file with my taxes, showing the IRS that $10,000 went toward a ho

By Denise Appleby AAA
A:

As you may already know, you must meet certain requirements, outlined in the 401(k) plan document, to be considered eligible to receive a distribution from the plan. Your employer or plan administrator will provide you with a list of the requirements.

Amounts withdrawn from your 401(k) plan and used towards the purchase of your home will be subject to income tax and a 10% early-distribution penalty. This applies even though the distribution will be used towards the purchase of your first home, because the first-time homebuyer exception does not apply to distributions from qualified plans such as 401(k) plans. Furthermore, if the amount you receive is rollover eligible, your employer is required by law to withhold 20% for federal tax, unless the amount is rolled directly to an IRA or other eligible retirement plan. Your employer must tell you whether the amount is rollover eligible.

Assuming you are eligible to receive the distribution and the amount is rollover eligible, you may instruct the 401(k) plan to process your distribution as a direct rollover to an IRA. This will ensure that the 20% federal tax withholding is not applied to the amount. Additionally, you can then withdraw the amount from your IRA for use towards the purchase of your first home, thereby avoiding the 10% early-distribution penalty. Remember, the maximum amount that may be distributed from the IRA on a penalty-free basis for the purpose of buying a first home is $10,000. This is a lifetime limit.

If you are under age 59 ½ when the distribution occurs, your IRA custodian may report the distribution as being eligible for an exception to the 10% penalty. This is indicated with a code '2' in <?xml:namespace prefix = st1 /?>box 7 of Form 1099-R. If the custodian does not make this indication, you may file IRS Form 5329 to claim the exception.

This question was answered by Denise Appleby
(Contact Denise)

RELATED FAQS

  1. How are real estate taxes calculated?

    Find out how real estate taxes are calculated; failure to pay these taxes that can be a substantial annual expense can lead ...
  2. What are the 403(b) contribution limits?

    Determine whether 403(b) contributions meet federal guidelines. Contribution limits to this retirement plan are determined ...
  3. How do real estate agents market themselves?

    Find an agent by checking popular real estate circulars featuring desirable neighborhoods and call the agent to ask questions ...
  4. Can I roll over a 403b plan?

    Learn whether distributions from a 403(b) plan can be rolled over, where they can be rolled over to and what the income tax ...
RELATED TERMS
  1. Elder Care

    Elder care, sometimes called elderly care, refers to services ...
  2. Commercial Real Estate Loan

    definition of a commercial real estate loan
  3. Eligible Transfer

    An IRS-allowed movement of assets into or out of an individual ...
  4. Realtor Property Resource (RPR)

    A National Association of Realtors member benefit providing realtors ...
  5. Housing Choice Voucher Program

    The Housing Choice Voucher Program helps families with very low ...
  6. Death Master File (DMF)

    Also known as Social Security Death Index. A list of people whose ...
comments powered by Disqus
Related Articles
  1. Top Financial Frights: Emergencies & ...
    Investing Basics

    Top Financial Frights: Emergencies & ...

  2. Steps To Retiring With A Reverse Mortgage
    Retirement

    Steps To Retiring With A Reverse Mortgage

  3. 10 Questions You Forget to Ask When ...
    Home & Auto

    10 Questions You Forget to Ask When ...

  4. When Your Job Offers An Awful Retirement ...
    Retirement

    When Your Job Offers An Awful Retirement ...

  5. Top 5 Strategies To Pay For Elder Care
    Retirement

    Top 5 Strategies To Pay For Elder Care

Trading Center