Taking 401(k) distribution for home purchase

[Guest rpetrk]

I have a 401(k) plan from my previous employer. Although I cannot make contributions I am allowed to have the account with them because I meet minimum eligibility requirements. My question is how much will I be taxed if I take a disbursement and use the money for the purchase of a home? Is it 20% + 10% penalty fee? Any way around it.

I have a similar question for my 2 rollover IRA accounts.

[jquazza]

Two things that confuse pension laymen:

-Taxes: Usually, when you withdraw money from a 401(k) or other qualified plan, you have to pay taxes on the amount you withdraw (as ordinary income, so the taxes depend on your tax bracket.0 If you are under 59 1/2 at the time of the distribution, you are subject to an additional 10% excise tax.

-Withholding: This is the portion of your distribution that get sent to the IRS, it may not necessarilly reflect your tax liability (could be more, could be less.) If you do not take the distribution in a direct rollover, you will be subject to a mandatory 20% withholding.

As far as ways around the taxes is concerned, there's really no way around it. There are few rules to get out of the 10% penalty, see IRC 72(t). Note not all exception will work from a QP plan. You may have to do a direct rollover to an IRA and take the distribtuion from the IRA.

[FJR]

jquazza,

Is 20% withholding applicable in the case of hardship mentioned? Would be up to the participant to have withholding or not?

[QDROphile]

Were do you find mention of a hardship?

[pmacduff]

Qdrophile - not sure if this is what FJR meant but I know our standardized doc lists "purchase of primary residence" as one of the hardships.....AFTER all available loans and other distribs have been taken. Our document, however, does not allow hardships for any reason to terminated participants, only active employee participants.

[QDROphile]

The first sentence of the post suggests that any distribution would not be an in-sevice distribution.

[Guest rmeigs]

Is 20% withholding applicable in the case of hardship mentioned?

Since rpetrk is not a current employee of the plan sponsor, his withdrawal of funds from the plan wouldn't be a hardship withdrawal, therefore hardship rules would not apply.

rpetrk: Be sure to look into rollover your account to an IRA before you make the withdrawal because the first $10,000 withdrawn from an IRA for the first time purchase of a primary residence is not subject to the 10% early withdrawal penalty. The definition of a "first time" home purchase is pretty liberal.

[R. Butler]

I agree with rmeigs about taking the down payment from the IRA. You may be avoid early withdrawal penalty, at least on the 1st $10,000.