401k plan distribution: would the 10% penalty apply to a distribution

[Guest joeydell]

Would the 10% penalty apply to distributions for the purchase of a first home? I'm presume the participant would not qualify for hardship withdrawal for the home purchase.

[Mary Kay Foss]

There is an exception to the 10% penalty for up to $10,000 used for the purchase of a new home for distributions from an IRA; it doesn't work with a 401k so any distribution would have to be rolled to an IRA first.

Purchase of a new home is one of the items mentioned in the regulations for a hardship distribution. Generally 401k plans do not allow distributions to employees under age 59.5; that's why there are hardship distributions. The hardship distribution would be subject to the 10% penalty and adversely affects the employee's ability to make additional deferrals to the plan.

[Guest joeydell]

Thanks for the reply. I had a disagreement w/ a client and I knew I was right. Both you and Datair had the same answer.

[QDROphile]

Hardship distributions adversely affect elective deferrals only in prototype plans and plans that rely on systems instead of brains.