401k distribution to purchase house (special circumstances)

[Guest sbjmg]

Hello and thanks in advance.

In 2009 my Grandfather purchased a home and then transferred it to me as a gift. I never lived in it but used it as a rental which it continues to be to this day. I am now getting married and need to purchase my first home. I have 32k in my 401k that I would like to use.

What are the ramifications of using it? Can I use it since I technically already own a home. I do not want to pay any penalties.

[ESOP Guy]

You need to find a tax adviser who can review your ALL of your facts and give you good advice.

For one thing your question makes no sense. The house was gifted to you but now you make it sound like you need to buy the house. Why do you need to buy a house you already own?

A good tax adviser would be able to make sure they understand all the facts correctly and give solid advice.

Please understand the taxes on $34k taken from a 401(k) plan wrong could be close to 50% of the money taken from the 401(k) plan. Spending a few hundred dollars on a CPA is way cheaper then doing it wrong. At the risk of being mean which I am not trying to be-- but stop being so cheap and go hire a good CPA for a few hours. Would you self diagnose a serious medical condition or go see a doctor? So why do people like you seem to think a few quick questions on a chat board is the way to go on tax questions that could cost them around $15k if done wrong?

In the end free advice tends to be worth what you pay for it-- nothing.

[Bird]

As I understand it, the existing home was a gift, it is rented out, and the poster wants to buy a new a different home for a principal residence.

I'm not sure about the ramifications of owning a "house" as a rental investment and then buying a "home" to live in - my guess is that it would qualify for the penalty exemption that applies to IRAs. There is no penalty exemption when taking money from a 401(k) so this was, I think, a good place to start - no you don't want to do this since the penalty would apply (plus taxes - generally, just because there isn't a penalty, doesn't mean it is a good idea to take money from a retirement plan; taxes alone can be significant...using retirement money for purposes other than retirement is generally a questionable move).

[jpod]

Depending upon the net cash flow from the rental and other metrics, it may be wise(wiser) to take a mortgage on the rental and use the proceeds to cover your down payment on your new home.