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Major life milestones often have a major tax impact. Changes in your marital status, having a baby or adopting a child can have significant impact on your taxes. This is the place to ask questions about dependents, real estate, and other various scenarios that play a significant role in what taxes you pay.

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Pioneer
Posts: 1
Registered: ‎08-29-2017
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401K Early withdrawl exemptions

I was recently let go from a job I worked for 10 years, I have bills that I need to pay and home improvement that needs to be done asap. I was looking to take 10,000 from my 401K, but was told that I would end up paying anywhere from 10%-20% in penalties. Are there any exemptions in my case? I do currently receive unemployment from the state, but not enough to pay the bills I had before I was unemployed and my current monthly bills.

Tax Pro
Posts: 5,725
Registered: ‎02-23-2016

Re: 401K Early withdrawl exemptions

Hi YEAdams86,

 

 

Welcome to the H&R Block community.

 

There's some good news here for you.  The federal income tax on $10,000 is equal to $0 thanks to your exemption and standard deduction, so if you have federal income tax liability after withdrawing these funds it's because you also have the unemployment income and/or any other income.  If the unemployment is the only other income you have then your federal income tax will not be a whole lot, if anything, depending on your credits, deductions, and withholdings.

 

As for the exemptions from the penalty, the home improvements would qualify if you are a first-time homebuyer (this is your first home and you just bought it this year).  If you meet that qualification then you're exempt from the penalty on the first $10,000 that you use for that purpose.

 

There are also exemptions for medical expenses and education costs but nothing specifically for being out of work.

 

There is an exemption for separation from service if you were over age 55 when you were let go from your job.

 

There is also an exemption if you withdraw your funds in equal payments from the account.  You must take the equal payments at least once per year over five a minimum of five years or each year until the year in which you reach age 59 1/2, whichever comes first.

 

If you're under age 55 and you want to withdraw the money all at one time you will end up with a 10% early withdrawl penalty, but the good news is that the normally the company that holds the account will withhold 20% of the withdrawn amount for federal taxes automatically so the penalty and your federal income tax liability should already be covered.  You may have additional funds withheld if your state imposes an income tax.  Note that the penalty does not go any higher than 10% for U.S. citizens & resident aliens.  If your federal income tax liability plus the early withdraw penalty is less than 20% of the withdrawn funds you'll get the difference back as a tax refund.

 

If you have any other questions I'll be glad to help.

 

Louis,

Senior Tax Advisor (Tampa, FL)

Associate (Pioneer)
Posts: 2
Registered: ‎07-11-2017

Re: 401K Early withdrawl exemptions

Hi LouisH,

 

I could be wrong here, but I am pretty sure the first time homebuyer exemption is only for IRA distributions.

 

Since the OP is considering a 401K distribution , I do not believe that exemption would be applicable in this case.

 

I have included a link to the relevant page in the Tax Book.

 

http://thetaxbook.net/thetaxbook-federal-2016/page-13-1

 

 

Tax Pro
Posts: 5,725
Registered: ‎02-23-2016

Re: 401K Early withdrawl exemptions

YEAdams86,

 

While I did give you the correct information regarding the first-time homebuyer exemption from the early withdrawl penalty, the H&R Block associate who replied to this post in addition to me is also correct.  I forgot to mention that the homebuyer exemption is only allowed for IRA withdrawls.

 

However, you would not have qualified anyway since, as I mentioned, this would have had to have been the purchase of your first house.  So you don't need to worry about this exemption, but I did want to make sure that you have complete information on it.

 

-  Louis