Solved

What happens if I took money from my 401k for a home purchase and the purchase fell through

Forum|Forum|6 years ago
June 1, 2019
4 replies
0 views

I made a hardship withdrawal of $7000 from my 401K and I had my employer take the taxes as well. I made an offer on a home and I think I was premature on my withdrawal because the purchase fell through and now I have this money sitting in my account and I don't want to be severely penalized for not using it. The housing market hasn't been very good, so I don't expect to find anything within 120 days. What can I do?

Best answer by dmertz

Hardship withdrawals are not eligible for rollover; the money cannot be put back into any retirement account as a rollover contribution. A hardship distribution is subject to tax and is subject to an early-distribution penalty unless a penalty exception applies:

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distri...

Even if you had purchased a home with the money, you would still have been subject to the same tax and penalty.

P

pinkyz-girlz

Put it back into an IRA

S

SweetieJean

This is not correct. See answer below.

D

dmertzAnswer

Hardship withdrawals are not eligible for rollover; the money cannot be put back into any retirement account as a rollover contribution. A hardship distribution is subject to tax and is subject to an early-distribution penalty unless a penalty exception applies:

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distri...

Even if you had purchased a home with the money, you would still have been subject to the same tax and penalty.

O

Opus 17

If not eligible for rollover, could the tax payer open a NEW IRA and make a tax deductible contribution up the the $5500 limit, and therefore somewhat offset the tax on the distribution?

DoninGA

First, a withdrawal from a 401k account cannot be used for a home purchase to be exempt from the 10% early withdrawal penalty. That is only available if the funds were withdrawn from an IRA and then only the first $10,000 is exempt from the penalty. See this IRS Tax Topic on non-IRA withdrawals and the penalty - https://www.irs.gov/taxtopics/tc558.html

Second, the withdrawal is a taxable event and is included on your tax return as ordinary income taxed at your current tax rate. Additionally, if you were under the age of 59 1/2 or if you have separated from the service of the employer and under the age of 55 at the time of the withdrawal then a 10% early withdrawal penalty will be assessed on your federal tax return as a tax liability. Any taxes withheld on the withdrawal will be entered on your tax return as a tax payment (just like from a W-2)