If I withdraw funds from a 401(k) to purchase a home, what penalty would I have to pay if I don’t use it all toward the purchase?

by Daria D. Palaschak, CPA | Jul 27, 2018
askacpaicon

If I take money out my 401(k) for a home and don’t use it all toward the house, what percentage of penalties would I have to pay?

There is no specific penalty exemption for a home purchase when you pull money out of a 401(k) plan. Any money you take out will be classified as a “hardship distribution,” assuming your 401(k) plan permits these types of withdraws. If you are not of retirement age, you will be assessed a penalty of 10 percent on the total amount withdrawn, both the amount you use for the house purchase and any extra not used for the house purchase. The total amount withdrawn will also be subject to federal income taxes.
 
An alternative strategy with a 401(k) plan is to take out a loan, if your plan allows for participant loans. Generally, a loan can be up to $50,000 or half the value of the account, whichever is less. As long as you can handle the resulting loan payments back to your 401(k) plan, this is usually a less expensive option than a straight withdrawal. Though you will pay interest (which is actually paid to yourself), you won’t pay taxes or penalties on the loan amount.

Another option would be to withdraw money from an IRA, if you have one. Taxpayers are generally allowed to withdraw up to $10,000 from an IRA (possibly more if it is a Roth) for the purchase of a first home without having to pay the 10 percent penalty. Income taxes may be due on some or all of the amount withdrawn, depending on what type of IRA it is.

A helpful chart is available on the IRS website regarding when the 10 percent applies or not with respect to distributions from various retirement plans.

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: Daria D. Palaschak, CPA, is a tax partner with Sisterson & Co. LLP in Pittsburgh, Pa.

Disclaimer
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.
Financial FAQs

Search the most frequently asked finance and accounting questions and read the responses from PICPA members. Always consult a CPA before taking action.

Search