I have a 401K from a previous job that I would like to use the funds to purchase a new home. Should I take the funds now or wait until the closing date in January 2016?

[antburris]

The P&S agreement will be signed December of 2015 but the closing is January 2016.

[Hal_Al]

It doesn't matter. Home buying is not a penalty exception for 401ks. It is only for IRAs. You may want to look a borrowing from your 401k, instead of withdrawing

[Critter1]

Or rolling it into an IRA before taking a distribution ... it may cost a couple of bucks to open & close the IRA (if you only move the 10K for the first time homebuyer exception) however it would save $1,000 in penalty.

[Critter1]

And wait until January so if the closing doesn't go thru you have the distribution & repayment in the same tax year to avoid possible IRS questions later.

[dmertz]

The type of account from which the distribution is made is only relevant if the distribution is an early distribution.  As Critter said, the first-time homebuyer exception is only available for distributions from an IRA.  If you are not a first-time homebuyer, as defined by the tax code, you won't be able to take advantage of this exception even if the distribution comes from an IRA.

For the definition of a first-time homebuyer, see  IRS Pub 590-B:
<a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p590b/ch01.html#en_US_2014_publink1000230925">https://www.irs.gov/p...>

If you do qualify for this exception, you should make sure that the distribution from the IRA occurs shortly before closing.  This means that the rollover from the 401(k) to the IRA will need to be complete before that.

[SweetieJean]

You can also take part in December and the rest in January, to spread the tax impact over two years.

[SteamTrain]

And
...if the closing is in the Early part of January (first two weeks), I doubt you can  a) get the funds in your hands....b) deposit in the bank AND have the $$ clear and allow you to get a certified check for the closing .

You should talk to the 401K administrator to see how long it takes them to issue a check. A few...in the past...have taken several weeks to process and issue a check, but your 401K Admin may be more prompt.  Ask now.

[Opus 17]

If you are a first time home buyer, you can withdraw up to $10,000 from an IRA for the purchase of a home and be exempt from the 10% penalty for early withdrawal.  You will still owe regular income tax on the withdrawal.  If you withdraw more than $10,000, you will owe income tax and the penalty on that amount.  It could be up to 50% total tax, depending on your income level and state tax rate.  If you are not a first time home buyer you will owe income tax and the penalty on the entire amount.

You are a first time home buyer for this rule if you have not owned any other home for at least 2 years before you sign the purchase offer on the new home.

You can convert a 401K to an IRA, make sure you do a direct rollover (from institution to institution). If you handle the money, you will have additional problems with taxes.  

Additionally, you must close on the house within 120 days from when you withdraw the money, if you don't close in 120 days, the withdrawal is not exempt from the penalty even if you eventually close on the house and use the money for the house.  If you can't close, you can put the money back, BUT some plan managers may not allow this, since the 120 day rule in this case is different from the normal 60 rule to put money back without taxes, so you may want to check with the IRA plan manager before you make the withdrawal.

I also see a suggestion about taking a loan from the 401K or IRA instead of converting it and taking a withdrawal. Taking a loan certainly would save you a lot on taxes and would allow your retirement funds to grow much faster. But, be sure to disclose the loan to your mortgage bank.  It may affect your mortgage eligibility.

As a piece of general advice, if you are no longer employed with the original employer, you have the right to move your 401K to an IRA, even if you don't plan to borrow or withdraw any money.  You may want to evaluate your investment options -- is your employer's plan good, or would you like to move to an IRA anyway so you have different investment choices.

[SweetieJean]

and check the plan docs, as many will not permit a former employee to take a loan.