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)?
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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.
thanks. I am 63. Isn't there a capital gains exemption of $500k if you are married and filing jointly?
Yes but on a house SALE. Not for buying a house.
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.
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