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.

[Opus 17 · Accepted solution]

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.

[SweetieJean]

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.

[Opus 17]

Well, as noted, they have 60 days to return funds to the 401(k), which, if they are within that time frame, is far far smarter than putting the money in the spouse's IRA.  The IRA is not a bad solution if it is after 60 days, but understand that you have to contribute ~$5,000 to save ~$1,000-$1,500 on taxes, depending on tax bracket and state taxes, and that money can't be touched until retirement.

(As a side note, I'm a bit surprised that the employer allowed a "hardship" withdrawal for the purchase of a new home.  Hardship withdrawals are supposed to be tightly restricted.)

(For anyone else reading this in the future, taking a loan from the 401(k) might have been wiser.  It doesn't show up on a credit report, and it's not taxable unless you default on the payments.)

[dmertz]

A hardship distribution from a qualified retirement plan like a 401(k) is NOT eligible for rollover.

[Opus 17]

Is there a difference between a rollover (to a different fund) vs putting the money back in the same fund?

[macuser_22]

 Employees who take a hardship distribution can't:
   - repay it to the plan, or
   - roll it over to another plan or an IRA.

<a rel="nofollow" target="_blank" href="https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-hardship-distributi...>

[macuser_22]

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.

[xmasbaby0]

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. 

[dmertz]

A hardship distribution from a qualified retirement plan like a 401(k) is NOT eligible for rollover.

[xmasbaby0]

@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)

[macuser_22]

Without the "hardship" the distribution would not be allowed at all for any reason prior to retirement.    That is what a "hardship" distributions is - to allow a distribution which would otherwise not be allowed at all under the plan rules.

[xmasbaby0]

I have been doing a little homework and cannot understand how the plan or the employer allowed a "hardship" withdrawal for a house purchase.  Curious....or is the OP maybe just mis-using that term...

[TaxGuyBill]

@xmasbaby0   The IRS pretty much lets the employer/plan define "hardship", and from what I have read, most employers/plans have gotten quite lenient on what defines a "hardship".

[dmertz]

Yes, it's up to the plan to determine if the circumstances constitute a hardship with regard to making a distribution before the individual would be eligible to receive a regular distribution.