Does first time home buyer exemption qualify for 1099-R reduction in early withdrawal penalty for 401k?

Yes, there is a first-time home buyer exemption, but there's an important distinction here. The 10% early withdrawal penalty exemption for first-time home buyers typically applies to IRAs, not 401(k) plans. With IRAs, you can withdraw up to $10,000 penalty-free (but not tax-free) for a first-time home purchase. But with 401(k) plans, the rules are different. Generally, 401(k) hardship withdrawals for home purchases still incur the 10% early withdrawal penalty unless you meet other exemption criteria (like being over 59½). The good news is that if you had rolled your 401(k) funds into an IRA before withdrawing, you could have potentially qualified for the exemption. For future reference, that's a strategy some people use. When you get your 1099-R, check box 7 for the distribution code. This will give you more information about how your plan administrator classified the withdrawal. Also, some 401(k) plans may have specific provisions, so you might want to double-check your plan's rules.

After reading your situation, I want to share something that really helped me when I had a similar tax issue with my retirement withdrawals. I was super confused about all the distribution codes and exemptions, especially since I had both a 401k and IRA withdrawal in the same year. I ended up using https://taxr.ai which saved me hours of frustration. I uploaded my 1099-R and it analyzed all the penalties and exemptions that applied to my situation. It flagged that I qualified for an exception I hadn't even considered (separation from service after 55). What was really helpful was that it explained exactly how the first-time homebuyer exception works with different retirement accounts and showed me which forms I needed to file. Might be worth checking out since your situation sounds complicated with the hardship withdrawal and potential exemptions.

Just wanted to update after trying the taxr.ai site mentioned above. It actually helped me figure out that while my 403b withdrawal didn't qualify for the first-time homebuyer exemption, I did qualify for another exception I hadn't considered. I had changed jobs at 56 (which I didn't think was relevant), and the system identified that I qualified for the "separation from service after 55" exception, which waived the 10% penalty entirely! Saved me almost $4,200 in penalties I was about to pay unnecessarily. It also explained exactly why the first-time homebuyer exemption didn't apply to my 403b (same rules as 401k) but would have applied if I'd rolled it to an IRA first. Definitely cleared up my confusion around the 1099-R codes.

If you're still struggling with getting clear answers about your 401k withdrawal penalties, I'd recommend trying to speak directly with the IRS. I was in a similar situation last year and spent weeks trying to figure out if my withdrawal qualified for an exception. After going in circles with online research and getting conflicting advice, I finally called the IRS directly using https://claimyr.com and got through in about 15 minutes (instead of the usual hours-long wait). You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed exactly which exceptions applied to my situation and explained that while the first-time homebuyer exception doesn't apply to 401k withdrawals directly, there were other aspects of my withdrawal that qualified for different exceptions. They even explained exactly which forms I needed to file to claim the exceptions properly.

I was totally skeptical about that Claimyr service mentioned above, but I was desperate after my third attempt waiting on hold with the IRS for over 2 hours before getting disconnected. I decided to try it as a last resort, and no joke, I got a call back with an actual IRS agent on the line within 20 minutes. The agent confirmed that my 401k withdrawal for a home purchase DIDN'T qualify for the first-time homebuyer exemption, but then she went through my situation in detail and discovered I was eligible for the "substantially equal periodic payments" exception since I had set up my withdrawal in a specific way. Saved me from paying a $4,700 penalty I thought was unavoidable. Worth every penny just for the time saved not being on hold, but the actual tax guidance was even more valuable.

Something important no one has mentioned yet - even if you can't avoid the 10% penalty on your 401k withdrawal, you should make sure you're getting proper "credit" for the 10% federal tax you already had withheld when you took the distribution. When you enter your 1099-R in your tax software, make sure the withheld amount (should be in Box 4) is properly flowing through to your total payments on your return. This won't reduce the penalty, but at least ensures you're not double-paying on the tax portion. Also, I'd recommend checking if your state offers any different exceptions than the federal rules. Some states have their own rules about early withdrawal penalties, though most follow the federal guidelines.

I have a question related to this topic - I withdrew from my Roth IRA for a first home purchase about $12k. I've owned the home for 8 months now but haven't filed taxes yet. Will the first-time homebuyer exemption apply to the full amount or just $10k? Anyone have experience with this?

I've been following this thread and wanted to add some clarification about the different retirement account types and their withdrawal rules, since there seems to be some confusion. The key distinction is: - **401(k)/403(b)**: First-time homebuyer exemption does NOT apply. You'll pay the 10% penalty unless you qualify for other exceptions (like separation from service after age 55, as mentioned by others) - **Traditional/Roth IRA**: First-time homebuyer exemption DOES apply up to $10,000 lifetime limit For your situation with the $35k 401(k) withdrawal, unfortunately the penalty will likely apply to the full amount. However, definitely explore the other exceptions mentioned in this thread - some people qualify for exemptions they didn't know about. One strategy for the future: if you're planning a major purchase and have both 401(k) and IRA funds available, prioritize withdrawing from IRAs first to take advantage of the more flexible withdrawal rules. You can also consider rolling 401(k) funds to an IRA before withdrawing, though there are timing considerations and potential downsides to evaluate. The $3,500 in federal withholding you mentioned should definitely be credited toward your tax liability, so make sure that's properly reflected when you file.

I went through a very similar situation last year and want to share what I learned the hard way. Like you, I withdrew from my 401(k) for a first home purchase and was hoping the first-time homebuyer exemption would apply. Unfortunately, as others have confirmed, that exemption only applies to IRAs, not 401(k) plans. I ended up paying the full 10% penalty on my $28k withdrawal. The distinction between retirement account types is really important and not well understood by most people. However, I did discover a few things that helped minimize the damage: 1. Make absolutely sure your 10% federal withholding is properly credited on your return - this is crucial and sometimes gets missed in tax software 2. Check if you qualify for ANY other exemptions (disability, medical expenses over 7.5% of AGI, higher education expenses, etc.) 3. Consider if the timing of your withdrawal might qualify for the "separation from service after 55" rule if you changed jobs One thing I wish I had known beforehand: if you have both 401(k) and IRA funds available, always withdraw from the IRA first for major purchases like homes. The withdrawal rules are much more flexible. Also, you can potentially do a rollover from 401(k) to IRA before withdrawing, though you need to be careful about timing and plan rules. The silver lining is that you got your house in a good market! Sometimes the financial benefits of timing a purchase right can outweigh the tax penalties, even though they sting.

I'm dealing with a similar situation and wanted to share what I discovered after consulting with a tax professional. While the first-time homebuyer exemption unfortunately doesn't apply to 401(k) withdrawals (only IRAs), there might be one more avenue worth exploring that hasn't been mentioned yet. If your 401(k) plan allows for loans rather than hardship withdrawals, and if you're still employed with the same company, you might be able to retroactively restructure part of this as a loan instead of a withdrawal. Some plans allow this within a certain timeframe, though it's not common and depends entirely on your specific plan rules. Also, double-check the timing of your withdrawal against any job changes. The "separation from service after age 55" exception has been mentioned, but there's also a lesser-known rule about withdrawals made in the same calendar year you separate from service (even if you're under 55) that might apply in very specific circumstances. Given the complexity and the substantial penalty amount you're facing, it might be worth the cost of a one-hour consultation with a tax professional who specializes in retirement distributions. Sometimes they catch exemptions or strategies that general tax software misses. Hope this helps, and congratulations on the house purchase! Even with the tax implications, homeownership in a good market was probably still the right financial move.