Your Tax Questions Answered
401k Early Distribution Penalty
Kiplinger editorial director Kevin McCormally and fellow tax experts Peter Blank and Mary Beth Franklin tackle your most pressing tax challenges.
April 15, 2009
QUESTION: I withdrew $10k in 2007 to purchase my first home. I had $1k taken out of the distribution before I received it for federal taxes. I received a letter from IRS stating that I owe the additional $1k for the early withdrawal penalty. Do I owe IRS this additional $1k since the money was for my first home purchase? --JK
KEVIN ANSWERS: You are correct that the 10% penalty for early withdrawal from an IRA
does not apply to up to $10,000 used to buy your first home.
I think the problem here is that the IRS doesn't know that's what you used the money for. I suggest you call the number on the statement you received from the IRS and explain the situation. You'll probably be asked to fill out a form 5329 -- http://www.irs.gov/pub/irs-pdf/f5329.pdf - on Line 2, you'll show what exception to the penalty you qualify for.
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Reader Comments (1)
Posted by: Mike G at 06/25/2010 02:44:52 PM
I have an idle 401K that I've never rolled over into my current 401K (different company). My former employer's 401K manager never did report a loan that I had taken out before I moved to my new company (bal. approx $19K). With that "loan account" my old 401K balance is about 100K. I am in dire need of reducing credit card and other debt (in excess of $50K for both my wife and myself). I am still working full time. Would you recommend for or against my taking an early withdrawal of my entire 401K balance, paying the taxes due and any potential penalty, to relieve my debt situation? I am 63 years old, retired federal employee (on annuity), and actively contributing to another 401K, and plan to retire fully in 2-3 years. Thanks.