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Buying a first home: Best method for positioning $10,000 401k money for down payment?

Son has $18000 401k. He no longer works there. He wants to buy a house. Instead of doing a roll over and pulling $10,000 out penalty free/not tax free, would he be better off paying tax as long term capital gains? He has a job that pays about $55,000 a year. His 401k has had 81.5% growth in the last two years. Started at 0 in mid 2010...quit the job in 2012...401 k grew to $18,500 total. Is it possible to take about $10000 out and pay taxes as long term capital gains? Would this be a better choice than the rollover and withdrawal as first time home buyer?

Jan 13, 2014 by C from Foristell, MO in  |  Flag
1 Answer  |  3 Followers
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3 votes

Funds withdrawn from a 401(k) are treated as ordinary income, just as if he'd earned it in salary. Unfortunately, there's no way to obtain long term capital gains tax treatment in your son's situation.

3 Comments   |  Flag   |  Jan 13, 2014 from Clackamas, OR
C

So an NUA would not be a alternative if well thought out and executed?

Flag |  Jan 13, 2014 near Foristell, MO
Larry McClanahan, CFP®, ChFC, CLU, CASL

The Net Unrealized Appreciation (NUA) strategy can be applied to certain situations where the 401(k) holds highly appreciated employer stock. It does not apply to general mutual fund or other investments in the plan. The strategy is primarily helpful to those in a high ordinary income tax bracket in situations where the employer's stock has significantly appreciated in value.

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Flag |  Jan 13, 2014 near Clackamas, OR
C

He meets the criteria.....but all in all there isn't a significant difference in reduction of taxes since the amount isn't substantial. Especially if he would still have to pay the 10% penalty. Thank you, just wanted to explore the idea!

Flag |  Jan 13, 2014 near Foristell, MO

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