#401kWithdrawal #401kHomePurchase #401kPenalties #FirstTimeHomeBuyer #RetirementSavings
Hey there! It sounds like your friend is definitely in a tough spot after using his 401k to buy a house. It’s a complicated situation, but there are definitely resources and options he can explore to figure this out. Let’s take a closer look at what he can do to navigate this tricky situation.
Understanding the 401k Withdrawal Rules
First off, it’s important to understand the rules and penalties associated with withdrawing money from a 401k for a home purchase. Here are a few key points your friend should be aware of:
1. Early Withdrawal Penalties: Typically, if you withdraw funds from your 401k before the age of 59 ½, you may be subject to a 10% early withdrawal penalty on top of regular income taxes.
2. Exceptions for First-Time Home Buyers: The IRS does provide an exception that allows first-time home buyers to withdraw up to $10,000 from their 401k without incurring the early withdrawal penalty. However, this amount is still subject to income taxes.
3. Tax Implications: Any 401k withdrawal is generally considered taxable income, so your friend should be prepared to pay income taxes on the amount he withdrew for the home purchase.
Options for Dealing with the Tax Bill
Now that your friend is facing a significant tax bill as a result of his 401k withdrawal, he’ll need to explore his options for addressing this financial burden. Here are a few things he can consider:
1. Set Up a Payment Plan: The IRS offers payment plans for individuals who are unable to pay their tax bills in full. Your friend can work with the IRS to set up a manageable monthly payment plan to gradually pay off the taxes owed.
2. Seek Tax Relief Programs: There are various tax relief programs and options available for individuals facing large tax bills. Your friend can explore options such as an Offer in Compromise or Currently Not Collectible status to potentially reduce or defer his tax payments.
3. Consult a Tax Professional: It’s always a good idea for your friend to seek the expertise of a qualified tax professional. A tax accountant or financial advisor can review his situation and provide personalized advice on how to best handle the tax implications of his 401k withdrawal.
Rebuilding Retirement Savings
With a significant portion of his 401k now depleted, it’s crucial for your friend to start thinking about how he can rebuild his retirement savings. Here are some steps he can take to work towards rebuilding his financial security:
1. Maximize Employer Contributions: If your friend is still employed and has access to a 401k or similar retirement plan, he should aim to maximize his contributions to take advantage of any employer matching contributions or tax benefits.
2. Explore Alternative Retirement Savings Options: Your friend can look into alternative retirement savings vehicles such as IRAs, Roth IRAs, or other investment accounts to start building up his retirement nest egg again.
3. Consider Seeking Professional Financial Advice: Working with a financial planner or advisor can help your friend develop a personalized strategy for rebuilding his retirement savings and achieving his long-term financial goals.
Encouraging Financial Literacy and Planning
Lastly, it’s important for your friend to focus on developing strong financial literacy and planning for his future financial well-being. Encourage him to educate himself on the implications of tapping into retirement savings and to approach major financial decisions with careful consideration.
Additionally, your friend can benefit from resources and tools that provide guidance on budgeting, managing debt, investing, and saving for the future. There are numerous reputable financial education resources available online and through local community organizations that can help him improve his financial management skills.
In conclusion, while your friend may be facing a challenging situation due to using his 401k to buy a house, there are steps he can take to address the tax implications and start rebuilding his retirement savings. By understanding the rules surrounding 401k withdrawals, exploring options for addressing the tax bill, and focusing on financial literacy and planning, he can work towards achieving a more stable financial future.
Ultimately, it’s important for your friend to seek professional guidance and take proactive steps to secure his financial well-being. I hope these insights and resources can provide him with a starting point for navigating this difficult situation. Wishing him all the best as he works towards finding a resolution! 🏡💰📈
How much did he withdraw?
It’s likely there’s very little that can be done at this point other than asking the IRS for a payment plan.
How long ago did this occur?
While penalty may be able to be waived, it applies only up to 10K of the distribution.
Tax can never be waived.
There is a first-time home buyer penalty exception for withdrawals up to $10k from an IRA.
There is nothing similar for 401k. The 10% penalty still applies, even if the 401k plan allows the money to be taken out via a hardship withdrawal.
Ordinary income tax is also still applicable in both cases.
Your friend doesn’t really have any options to reduce the tax bill. They can set up a payment plan if they can’t afford to pay it all at once.
Did he take a withdrawal or a loan from the 401k? Taking a 401k loan is common and not subject to tax or penalties. You basically pay the money back to your 401k plus some interest
Wow. With these kind of financial moves i’m not sure anything you say to him will resonate.
I mean these are compounding stupid decisions.
Plan administrators make it VERY clear there will be penalties and taxes due on 401k withdrawals. There is no way he did not know about this.
I’m shocked how many people borrow/withdraw from their 401k like it’s nothing. A lot of my co-workers have done this and when I see their balances as they are getting ready to retire I just shake my head.
Even if he was exempt from a fee did he think he was exempt from the taxes?
He just needs to set up a payment plan with the IRS.
you would think he would have been informed of the taxes and fees associated with the withdrawal before he took out the money…
What? None of this makes sense.
If your friend is enrolled in a 401k program with an active employer he wouldn’t be able to take a distribution from his savings, but he would take a loan from himself. The only way he would be taxed on this (as if it were income) is if he lost his job or otherwise stopped paying on the loan.
If you friend took a distribution before 59 1/2 from a previously held 401k with another employer, the management group automatically withholds 20% for exactly this reason.
None of this story makes sense.
Exactly how much are we talking about that ended up with a $150K tax/fee?
He took out enough to owe $150k in taxes and it was only a downpayment? Was this a multimillion dollar house?
If he doesn’t want to go on a payment plan, his only option is to sell the house and use the proceeds (hopefully there will be a small increase in equity) to pay the tax bill. 401ks/IRAs are assets in name only until you are retirement age, with very few exceptions.
I could be wrong but I think he has until April 15th tp replace that money back in the 401k to avoid the taxes and fees. If this is true, I’d suggest he get a loan for the amount withdrawn and avoid the taxes and fees.
Did he pay any taxes at the time of withdrawal? Why on earth did he think it was exempt from them?
He needs to hire a tax professional to get this sorted out at this point, there’s too many variables in fixing this – what does his 1099r look like from the first withdrawal, and his general income and tax bracket normally and in the year he did the withdrawal (that amount could have bumped him up considerably for that year) and what kind of withholding he did for the second withdrawal
Not sure if this amount this allowed but maybe a home equity loan to pay the taxes? If he put down such a large down payment, he should have plenty of equity. The home equity will have better terms than the IRS. Penalties and interest aren’t cheap for the IRS.
Telling him to **see a tax attorney or other finance professional ASAP** is the best & only advice you can give him.
You can’t advise your friend when you don’t know exactly what he’s done. Plus you’re not a tax professional yourself. Any “amateur” advice would only make things worse for him.
Is there any such exemption for buying a home?
He took a WITHDRAWAL, not a LOAN. You don’t have to pay penalties or tax for a loan.
His plan allows him to take money out for a home purchase.
It will not allow him to take out more money for taxes. He will not qualify for a hardship withdrawal (the house is an asset).
He either makes a payment plan with the IRS, or he sells the house and learns a very expensive lesson.
Oof!
Sounds like he put down about $275-325k. Given it will be taxed closer to his marginal bracket plus the 10% penalty that should hit close to the $150k claimed.
This was… a horrible idea. He would have been way better off doing a 401k loan to access funds.
Only thing to do now is to make a payment plan with the IRS and LEARN the lesson that will now have to be bought and paid for.
I took out $10k to use for a down payment and they told me at least a dozen times that I might have to pay taxes and penalties on it. Did your friend just ignore every warning?
He should have had some advice from a tax professional before making this move. And he should have some now. Tell him to consult an accountant or tax attorney.
A payment plan for that amount may also result in a tax lien.
The two options here are to either setup a payment plan for taxes due (the OP’s friend makes enough where this should be possible by limiting spending for the next several years). Or, sell the house, pay the taxes, and buy a home he can actually afford. Dipping deeper into the 401k should not even be considered.
Blows my mind that somebody with a well paying job who can apparently afford a million dollar home (or maybe not, hence the 401K withdrawal) would make such a huge withdrawal in such an uninformed manner. I almost don’t believe the story. Don’t think there’s anything you can do to help him, outside of suggesting that payment plan. Not to mention, there is almost no way that he was able to make that withdrawal without red flags and warnings popping up all over his withdrawal application about penalties and taxes that would be owed. I have to ask, are you sure it was a 401K and not an IRA?
tell him get a heloc for 150k to pay it back. or set up payment w irs.
The nice thing is that most personal finance stuff isn’t complicated. The problem is that the rules just aren’t usually super clear, and you have to do research.
This is an incredibly, incredibly common question. There are many, many articles about this.
https://www.investopedia.com/ask/answers/081815/can-i-take-my-401k-buy-house.asp
https://smartasset.com/retirement/making-a-401k-withdrawal-for-a-home-purchase
Your friend should look into “hardship withdrawal” and whether that will let him avoid the 10% penalty https://www.investopedia.com/retirement/relief-401k-hardship-withdrawals/
Taxes have to be paid. Like others said, IRS is decently willing to do a payment plan, but that’s still a lot of taxes. Hopefully your friend can avoid the penalty.
NAL.
I took a hardship withdraw from my 401k for a house down payment. Taxes were still due.
Hardship is the ability to take it for this. It does not exempt you from the tax as it is counted as additional income.