AboutJohn Stancil, CPA Expertise I can answer questions on personal income taxes, partnerships, and some corporate income taxes. I can deal with some state tax questions. Limited gift and estate tax questions. I am also familiar with ministerial and church tax reporting issues. I teach tax and accounting at a small church-related college. Sales taxes and property taxes are state and local issues so I am not likely be be able to give you an in depth answer on those types of taxes. I have maintained a part time tax practice for over 30 years. I am a member of the AICPA, National Society of Tax Professionals, and the Institute of Management Accountants.
Experience I hold a doctorate in Accounting, and four professional certifications: CPA, CMA, CFM, and CIA. I passed all certification examinations on the first attempt, and received honorable mention for my scores on the CIA exam. I write a monthly tax column for the local newspaper.
Expert: John Stancil, CPA Date: 3/29/2005 Subject: 401k cash out for home
Question Dr. Stancil,
I left my old job earlier this year. My wife and I are in the process of building our first home. I know that to get my 401k out of my old job, they will withhold FIT. I also know that I must pay the penalty if I directly withdraw from the 401k for the home expenses. However, my question is can I avoid the penalty by first rolling over the 401k into a regular IRA and then cashing out of the IRA? If so, is there a holding period?
Thank you!
Answer Justin,
Thanks for your question.
It doesn't quite work that way. When you withdraw the funds from your 401k, your employer will withhold 20% for income tax. This is just like withholding from your pay check.
When you file your taxes next year, you report the 401k withdrawal and the taxes withheld. If any of the amount distributed to you qualifies for exclusion for the purchase of a first home, you exclude that amount from penalty and pay the 10% penalty on the remainder. The limit for first time home purchases is a lifetime cap of $10,000.
To my knowledge, there is no legal restriction on rolling it into an IRA, then making a withdrawal, but the IRA custodian would likely extract a penalty for leaving it in there for such a short time.
