Janitor Bob Posted February 19, 2013 Report Share Posted February 19, 2013 Client withdrew $8,000 from his 401k to use as a down-payment on his first home.....because a "friend" told him it would not be taxable if used to pay for a house. Now I get to tell him that it IS taxable and also will be charged additional 10% penalty because the withdrawal was from a 401....NOT and IRA (thus, 5329 exception 9 does not apply).....I am correct....yes? Quote Link to comment Share on other sites More sharing options...
mcb39 Posted February 19, 2013 Report Share Posted February 19, 2013 You are correct. Quote Link to comment Share on other sites More sharing options...
Janitor Bob Posted February 19, 2013 Author Report Share Posted February 19, 2013 ....but thanks for confirming. I wish clients would speak to me (or some at least some other tax professional) instead on relying on "friends" for tax advice....I hate giving bad news. Quote Link to comment Share on other sites More sharing options...
ljwalters Posted February 19, 2013 Report Share Posted February 19, 2013 I tell all my clients to call me before making large financial decision. For the most they all do. Should I refnance my home to pay down the rental mortgage? Can I take money from 401k to buy home? My mother died if I sell her stock to I owe taxes? These are the most common. I tell them up front when I know they have money they could misshandel To Call First and not need me to say "wish you had Called" during tax season. Quote Link to comment Share on other sites More sharing options...
jainen Posted February 19, 2013 Report Share Posted February 19, 2013 >>.I hate giving bad news.<< How is that bad news? It sounds like a very savvy investment, taking near-maximum advantage of an obscure exception to the rule that 401(k) money is locked up. Would you have advised him to avoid the $800 penalty to incur the far greater cost of a lost opportunity? Just dodging mortgage insurance would pay for it all, without even thinking how interest replaces non-deductible rent. Or if he had to borrow $8000 more it would only take a couple of years for the extra interest to exceed the penalty. And what about the potential for highly-leveraged capital gain? In case you haven't noticed, we seem to be at the very bottom of the real estate market, with the lowest interest rates any of us will ever see. Would he really be better off leaving it in the managed money funds that are earning nothing or even losing equity these days? Remember our standard advice is that tax consequences should be secondary in any financial decision. If you still aren't convinced yet, consider the non-financial benefits of home ownership. This deal was so good that even incorrect tax advice couldn't hurt it! Quote Link to comment Share on other sites More sharing options...
Janitor Bob Posted February 19, 2013 Author Report Share Posted February 19, 2013 I'm not saying I would have advised against it.....But He would have been informed of the consequences. Compared to what he had in mind (that the full $8,000 would be completely non-taxable), my news is bad Quote Link to comment Share on other sites More sharing options...
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