I took a hardship withdrawal from my 401K to buy a home. I’m trying to find out how much we should contribute to my spouses IRA to keep from paying so much in taxes.

Forum|Forum|7 years ago
June 6, 2019
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Best answer by Opus 17

Your question really makes no sense. You will owe federal income tax plus a 10% penalty on the 401K withdrawal.

Any deduction will reduce your income tax, but that requires putting more money someplace you can't touch it than you get as a benefit. For example, if you donate $1000 to charity, you will save $250 in taxes, but that means that another $750 has gone out of your pocket never to be seen again.

If you have (let's say) up to $5000 that you could put in your spouse's IRA, it would be far smarter to put that $5000 directly toward the house and withdraw less from your 401(k) -- or put it back in the 401(k) if it is within 60 days.

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Opus 17

Answer

Level 15

Your question really makes no sense. You will owe federal income tax plus a 10% penalty on the 401K withdrawal.

Any deduction will reduce your income tax, but that requires putting more money someplace you can't touch it than you get as a benefit. For example, if you donate $1000 to charity, you will save $250 in taxes, but that means that another $750 has gone out of your pocket never to be seen again.

If you have (let's say) up to $5000 that you could put in your spouse's IRA, it would be far smarter to put that $5000 directly toward the house and withdraw less from your 401(k) -- or put it back in the 401(k) if it is within 60 days.

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SweetieJean

Alumni - Champ

I think OP already bought the house, and then was caught off guard by the amount of taxes due. So they're now doing some damage mitigation.

macuser_22

Alumni - Champ

This is like robbing Peter to pay Paul.

If you have sufficient earned income to contribute to a Traditional IRA then use that money towards the home and take less out of the 401(k) and possibly an additional 10% penalty if under age 59 1/2. They are both tax deferred accounts so there is no advantage to pay tax on one and deduct the other.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

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xmasbaby0

Level 15

Using an early distribution from a 401k (before you are 59 1/2) to make a down payment on a house is not an exception to the 10% early withdrawal penalty. You will owe that penalty plus ordinary income tax on the money you took out of your 401k. You can take money from a traditional IRA without the 10% penalty to purchase a first home but that is not the case for a 401k. If it has not been more than 60 days since you did this you could still pay it back to the 401k. Taking that money from a 401k is an expensive source of money to buy a house.

**Disclaimer: Every effort has been made to offer the most correct information possible. The poster disclaims any legal responsibility for the accuracy of the information that is contained in this post.**

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xmasbaby0

Level 15

@dmertz Is it because they called it a "hardship" distribution that means paying back in less than 60 days is not allowed? Without the "hardship" as the reason, would repayment within 60 days have been OK? ( I am trying to learn this)

**Disclaimer: Every effort has been made to offer the most correct information possible. The poster disclaims any legal responsibility for the accuracy of the information that is contained in this post.**

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SweetieJean

Alumni - Champ

I’m trying to find out how much we should contribute to my spouses IRA to keep from paying so much in taxes.

His total contributions to all of his traditional and Roth IRA's cannot be more than: $5,500 ($6,500 if he's age 50 or older), or his taxable compensation for the year, if that is less.

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