How much tax is due on the withdrawal from an employer-sponsored 401(k) account for the purchase of a first home?

by Joseph A. Pancerella, CPA | Sep 19, 2018

We withdrew $130,000 from an employer-sponsored 401(k) for the purchase of a first home. How much tax should we expect to pay? Our annual income before the withdrawal is $155,000. will we be able to claim tax deductions that will offset the tax?

From what I researched, the exception for first-time home purchase is only available for IRA withdrawals, not 401(k) plans. In addition, the exception is limited to the first $10,000 of withdrawals. So, assuming you are both below the age of 59 ½ (and assuming no age 55 and separation from service rules apply), you are not only going to pay income tax on the amount withdrawn, but also a 10 percent penalty.

It is very likely that, including state taxes, the amount of tax could approach 40 percent of the amount withdrawn. You should consider putting the money back within the allowable time limits and look for other sources for the down payment, or consider paying private mortgage insurance (PMI). This is not a sound financial decision. 

More information and consultation with a CPA would be needed to determine the exact amount of tax you are responsible for. However, I am confident that the amount will be considerable.

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

Answered by: Joseph A. Pancerella, CPA, is managing director of Pancerella & Associates LLC in Reading, Pa.

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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