Early Withdrawal

Question: I used my 401k as a down payment, do I still have to pay the 10% penalty?

In 2009, another company bought out the company I worked for. In doing so, they decide to dissolve the 401k plan I was in. So, I was faced with two options; roll the money over into an IRA or withdraw the money and use it towards a down payment on my first house. I decided to do the latter. My question is; I know I obviously have to pay taxes on the money I withdrew, but do I still have to pay the 10% penalty for Early Withdrawal? Or does the fact that my 401K plan had been dissolved or the fact that I used the money as a down payment on my first house excuse me from the 10% penalty? Any information would be greatly appreciated. Thank you.

Answer: There is an exemption from the penalty of up to $10K withdrawal from an IRA for buying a first house, but not from a 401K, so sorry, the penalty applies. If you had first rolled it into an IRA, and taken the down payment for the first house from the IRA, you’d have avoided the penalty on up to $10,000

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