401k withdrawl

If you are younger than 59 1/2 you will pay a 10% early withdrawal penalty and ordinary income tax if you take money out of a 401k.  There is no exception to the early withdrawal penalty for taking that money from a 401k.  With a traditional IRA you can take out money for a down payment without the early withdrawal penalty, but the rules are different for a 401k.  It is an expensive way to make your down payment.

First, you generally can’t withdraw any money from a 401(k) if you are still employed with the plan sponsor unless you qualify for a hardship discharge and the employer offers a hardship discharges, which they are not required to do.

Second, under IRS regulations, being a “first time“ homebuyer means that you did not own the home in which you lived for at least the past two years.  That might mean that you had a rental apartment, or it might mean that you owned a previous home but sold it more than two years ago, but it doesn’t really mean “first time“ in the sense that you can only use the rule once in your lifetime.

If you are no longer working for that particular employer, and you are determined to withdraw this money to help purchase a home, you will need to transfer or roll over the money into an IRA first, then withdraw it from an IRA. You can withdraw up to $10,000 from an IRA if you are a “first time” home buyer and be exempt from the 10% penalty, but you will pay the penalty if you withdraw the money directly from the 401(k) because it does not have the same exception.

You will probably lose 30% to state and federal taxes if you withdraw the money from an IRA and 40% if you withdraw directly from the 401(k).