Would taking an early withdrawal from my 401k cause my tax penalties if I used the funds towards my home?

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Question:

I used an early payment from my 401k to pay for my house.  Will I incur tax penalties?

 

Answer:

The laws can be confusing around the tax treatment of pension plans and retirement accounts, but the tax basics to understand are that 401k plans are different than other retirement accounts such as IRA’s.  While there are specific circumstances where buying a first home will avoid tax consequences from early IRA distributions, there is no such thing as a 401k early withdrawal home purchase exception.  The home purchase exception that helps individuals avoid tax penalties is not available to individuals who have 401k retirement plans.  In order to be eligible for the homebuyers’ exception pursuant to early distributions from IRA’s, the homeowner(s) must be first-time home purchasers and the distribution must not be for an amount over $10,000.  Married couples are required to satisfy the restrictions for both spouses in order to avoid the early distribution tax penalty.

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