Capital Gain

[jvotel]

If I cash in my 401k and use that money as a downpayment on a house, do I  consider the entire amount as income, or would it cancel out because it went to a capital purchase (house)?

[VolvoGirl]

It is income.  It doesn't matter what you do with it except if you roll it over to another 401K or IRA account.   It will add to your income and may push you inter a higher tax bracket so be careful.  And there is a 10% Early Withdrawal Penalty if you are under 59 1/2.  But you can avoid the 10% penalty if you use money from a IRA instead of a 401K to buy a new house.  

[jvotel]

thanks.  I am 63.  Isn't there a capital gains exemption of $500k if you are married and filing jointly?

[VolvoGirl]

Yes but on a house SALE.  Not for buying a house.  

[xmasbaby0]

If you take money out of a 401k you will get a 1099R for next year and have to enter it as income on your next tax return.  There is no tax break for using money from a 401k for the purchase or down payment on a home.  Money you take out of a 401k is taxable income.

  You must be confused by the rule that pertains to the SALE of a house----if you SELL a primary residence you have lived in for 2 out of the last 5 years, you do not pay capital gains on $250K if you are single, or on $500K if you are filing a joint return.