I pulled from my 401K to purchase my first home does this change the amount they deduct

[carlymaesciano-g]

I saw that this is a qualified withdrawal but I am confused as to why they are reducing my refund my so much

[Opus 17]

Sorry, you confused a 401(k) with an IRA.  Is it within 60 days?  You could pay it back and start over. 

You can withdraw up to $10,000 from an IRA for a qualifying "first time home purchase" and be exempt from the 10% penalty if you are under age 59-1/2.  You still pay regular income tax.

A 401(k) is NOT eligible under the same law; 401(k) plans and IRAs are controlled by different tax laws and have different rules, even though they have many similarities.  You could have rolled over part of your 401(k) to an IRA first then withdrawn from the IRA, but if you withdrew directly from the 401(k), the entire distribution is subject to regular income tax, plus a 10% penalty if you are under age 55. 

[AamilD · Accepted solution]

To clarify, did you do a withdrawal or loan from 401(k) since both are treated separately?

If you take a 401(k) withdrawal and are under the age of 59.5, then this withdrawal is considered income and will be taxed now. This is also true even if the proceeds were used to purchase your home.

If you take a 401(k) loan, this is not considered income and you will not be taxed on this.

You can visit Exceptions to the penalty for an early withdrawal from my 401(k) for more information.

[Opus 17]

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@AamilD wrote:

To clarify, did you do a withdrawal or loan from 401(k) since both are treated separately?

If you take a 401(k) loan, this is not considered income and you will not be taxed on this.

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Good point.  If you are testing your taxes, don't enter a 401(k) loan as a withdrawal.  It is not a withdrawal and you won't get a 1099-R for it.  (However, if you default on the payments, the remaining balance becomes a withdrawal.)

[VolvoGirl]

I think it says or asks if it's qualified because it's qualified to be rolled over to another account like a IRA.

It reduces your refund because it increases your income and tax and you did not take out enough withholding to cover the tax and 10% Early Withdrawal Penalty. You can lose like 50% of it for federal and state taxes and penalties.