Does first time home buyer exemption apply to 401k early withdrawal penalty on 1099-R? Help needed!

Yes, you should qualify for the first-time homebuyer exemption on your early 401k withdrawal, but with some important limitations. The IRS does allow an exception to the 10% early withdrawal penalty (not the income tax) for first-time homebuyers, but it's limited to $10,000 lifetime maximum. Since your withdrawal was $18,500, only the first $10K would be exempt from the penalty - you'd still face the 10% penalty on the remaining $8,500. To qualify as a "first-time homebuyer" in IRS terms, you (and your spouse if married) cannot have owned a principal residence during the 2-year period ending on the date of acquisition of the new home. The withdrawal must also be used within 120 days of receiving it for the home purchase. When filing your taxes, you'll need to fill out Form 5329 to claim this exception. Look for exception code "09" which is specifically for first-time home purchases. Make sure you have documentation proving the withdrawal was used for the home purchase (like closing documents).

I went through this exact situation last year and was totally confused by all the tax implications. I ended up using https://taxr.ai to analyze my 1099-R and home purchase documents. The tool immediately identified that I qualified for the first-time homebuyer exemption on the first $10k of my withdrawal. What I really liked was that it explained exactly how to report this on Form 5329 with the right exception code and even showed me where the documentation requirements were in the tax code. It saved me from making a costly mistake because I was initially going to pay the penalty on the entire amount!

Just wanted to update after trying taxr.ai based on the recommendation here. Initially I was skeptical, but it actually saved me about $950 in penalties! I uploaded my 1099-R and closing documents, and it immediately flagged that I qualified for the first-time homebuyer exemption on $10k of my withdrawal. What really impressed me was how specific it was about Form 5329 - it showed me exactly which lines to fill out and which exception code to use (09). It even warned me that my state (Oregon) doesn't follow the federal exception rules so I'd still owe state penalty. The documentation it provided gives me peace of mind in case of an audit too. Definitely worth checking out if you're dealing with retirement account withdrawals for a home purchase.

If you're having trouble getting clear answers from the IRS about this exemption (I know I did), I highly recommend https://claimyr.com to actually get through to an IRS agent. I spent WEEKS trying to call the IRS directly about my 401k withdrawal situation and could never get through. Claimyr got me connected to an actual IRS representative in under 15 minutes who confirmed my eligibility for the first-time homebuyer exemption and walked me through exactly how to document it on my return. You can see how it works here: https://youtu.be/_kiP6q8DX5c This saved me so much stress and potentially saved me from paying penalties I didn't actually owe. The IRS agent was able to look at my specific situation and confirm I was handling it correctly.

I need to apologize for my skepticism! After waiting on hold with the IRS for literally 2.5 hours yesterday and getting disconnected AGAIN, I tried Claimyr out of desperation. Within 18 minutes I was talking to an actual IRS representative who confirmed I qualified for the first-time homebuyer exemption on my 401k withdrawal! The agent explained that I needed to file Form 5329 with exception code 09 and gave me specific guidance on how to document everything properly. She even noted in my account that we had discussed this so there's a record if I get questioned later. For anyone dealing with 401k/IRA withdrawal penalties and struggling to get clear answers, being able to actually speak with someone at the IRS made all the difference. Would have saved me weeks of stress if I'd done this sooner!

Quick tip from someone who used the first-time homebuyer exemption last year: KEEP ALL YOUR DOCUMENTATION! The IRS specifically flagged my return for review because of the penalty exemption I claimed. I had to provide: - The closing statement showing purchase date - Documentation showing the withdrawal amount and date - Proof it was actually used for down payment (bank transfers) - Evidence I hadn't owned a home in the previous 2 years Everything worked out fine because I had all the paperwork, but it definitely got extra scrutiny. Just a heads up!

One thing nobody has mentioned yet - this exemption applies differently if you took the withdrawal from a Roth IRA vs traditional 401k/IRA! With a Roth IRA, you can actually withdraw your CONTRIBUTIONS (not earnings) at any time without penalty regardless of age. And for first-time home purchases, you can withdraw up to $10k of EARNINGS penalty-free after the account has been open 5+ years. With traditional 401k/IRA, you get the $10k first-time homebuyer exemption from penalties, but you still pay income tax on the full amount. Just wanted to clarify since the rules are different depending on account type!

Just want to add one more important detail that could save you money - make sure you're calculating the penalty correctly on Form 5329! I made the mistake of applying the 10% penalty to my entire $18,500 withdrawal initially, then trying to claim the $10k exemption as a separate line item. The correct way is to report only the $8,500 ($18,500 - $10,000) as subject to the early withdrawal penalty. So you'd pay the 10% penalty on $8,500 = $850, not $1,850 minus $1,000. It sounds like the same math but the IRS computers can flag it if you don't report it correctly on the form. Also, double-check that your 1099-R shows the correct distribution code. If it shows code "1" (early distribution, no known exception), you'll definitely need Form 5329 to claim your exemption. If it shows code "2" (early distribution, exception applies), your plan administrator may have already recognized the exemption, but you should still verify the amount. Hope this helps with your filing!

I'm in a similar situation with a 401k withdrawal for my first home purchase! One thing I want to add that hasn't been mentioned yet - make sure you understand the timing requirements. The IRS is pretty strict about the 120-day rule. The withdrawal needs to be used within 120 days of when you receive it, OR you can take the withdrawal up to 120 days after the home purchase. So if you closed on your house in December but didn't take the 401k withdrawal until January, you could still qualify as long as it's within that 120-day window. I almost missed out on the exemption because I thought the withdrawal had to happen before the purchase. My tax preparer caught this and saved me from paying the penalty on money I was eligible to exempt. Also, "qualified acquisition costs" include more than just the down payment - closing costs, settlement fees, and other costs directly related to acquiring the home can count toward that $10k limit. Just make sure you have receipts for everything!