Should I do a partial rollover or take a penalty for withdrawing 401(k) funds for a home purchase?

by Ibolya Balog, CPA | Jan 19, 2017
askacpaiconI withdrew funds from a 401(k) to purchase a home. The home purchase fell through, so I was told to put the money into a rollover 401(k) so I would not be penalized 10 percent from the IRS. I can put most of it back, but I can't cover all the taxes. The withdrawal was $17,000, and I can redeposit $13,000. We withheld $3,400 in taxes. Is it better to do a partial rollover or take the penalty?

A rollover has to be completed within 60 days of the distribution. As such, if the distribution was made recently enough that you are within the 60-day period and can complete the partial rollover before the 60 days expire, then a partial rollover will minimize taxes related to the distribution from the 401(k). However, if the distribution took place more than 60 days ago, that option is not available, and the full $17,000 will be subject to the early withdrawal penalty of 10 percent if you are under 59 years old. It will be counted as taxable income, and will be subject to applicable marginal federal income tax.

 If the 60-day rollover window expired, the best option is to place the remaining money in an after-tax investment account from which future home-purchase-related costs can be covered.

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Answered by: Ibolya Balog, CPA, is an associate professor at Cedar Crest College in Allentown, Pa.
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The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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