Early Withdrawal From Ira Hardship

March 5th, 2009

Question: Tax-free hardship withdrawal from 401 (k) for first-time home purchase?

My buddy’s tax guy is telling him that his hardship withdrawal from his 401 (k) in 2008 is not taxable because it was used as a down payment for his first home.

This is contrary to my understanding. I understood that only money taken from an IRA for first-time home purchase was exempt from the 10% early withdrawl penalty up to $10,000.

Any thoughts on this???

Answer: You are correct and your buddy’s “tax guy” needs to go back to flipping burgers or sweeping floors.

There is no “tax free” withdrawal from a 401(k) for hardship or any other reason. You can avoid the 10% penalty for early distributions for hardship reasons. However that does NOT include the purchase of a home. That’s limited to IRA distros only, not 401(k)s.

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