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H&R Block, Inc. Message Board

  • r_r_eight r_r_eight Apr 22, 2012 5:16 PM Flag

    Early Withdrawal Penalty

    Taxpayer bought a condo last month(his first). He put 20% down and financed the rest.

    Now taxpayer wants to buy a car.

    Would the penalty be waived if he withdrew from his 401K to buy the car?

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    • Tell your client to borrow the money from the 401k plan there is no penalty for that and also he may not be suspended from the plan for that money also the money he repays will be his money all interested is paid to him or her

    • r r eight, there is no first time homebuyer exception for distributions from a 401k. That break only applies to IRAs. If your client had bought a condo and a month later taken an IRA distribution to buy a car, he could likely get a waiver of the penalty. The condo purchase and the distribution happened in close proximity in time. The IRS doesn't know or care which dollars went to which purpose. If he waited more than a couple of months after buying the condo to take the distribution he wouldn't fall within the rules for penatly abatement. The point is moot, however, because the money is coming from a 401k not an IRA. He can't get out of the early distribution penalty unless he qualifies for some other exception.

    • The penalty is waived if he is 59 and 1/2 years old or if the withdrawl is a structured even distribution over several years (10.

      There are a few other waivers , but they don't appear to apply to this case.

    • There is no exception to the 10% penalty for early distributions from a 401K account for the purchase of a residence or car.

      There is an exception for a distribution from an IRA for qualified "first-home" purchases subject to a $10,000 lifetime cap.

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