Can You Use Your 401(k) Funds for Purchasing a Second Home Without Tax Penalties?
To discourage you from raiding your retirement plans early, the Internal Revenue Service tacks on a 10 percent tax penalty to nonqualified withdrawals from your 401(k) plan. Depending on your age and your circumstances, you might be able to use your 401(k) plan for a second home without penalty, but you'll always owe the taxes on the distributions.
If you've already hit 59 1/2 years old, you don't need to worry about any penalties because you're allowed to take qualified distributions from your 401(k) plan. Qualified distributions can be used for anything you want, including buying a second home. However, you're still on the hook for the income taxes on the withdrawal. For example, if you take out $100,000 when you're 60 to buy a second home, you'll owe taxes, but no penalties, on that $100,000 withdrawal.
Early Distribution Potential
Generally, if you're not 59 1/2 yet, you're only allowed to take distributions in certain circumstances: if you suffer a permanent disabilities or financial hardship, or after you've left the company. However, financial hardships must be an immediate and heavy financial need. While buying a primary residence or making payments to prevent your main home from going into foreclosure does qualify, buying a second home doesn't count as a hardship. So, if you're under 59 1/2 and still working for the company sponsoring your 401(k) plan, you can't even get your money out to buy a second home, much less do it without penalties.
No Second Home Exception
The IRS doesn't make an exception for early distributions taken to buy a second home. Even then, the early withdrawal penalty still applies. For example, if you've left your job and you take out $80,000 to buy a second home, not only do you owe taxes on the $80,000, but you also an $8,000 penalty unless you qualify for a different exception.
Separation After 55
If you've left your job after you turn 55, you can take out money without any penalties for any reason, including buying a second home. If you're a public safety officer for a state or local government, the age drops to 50. Your age only matters at the time you leave the job, even if you wait to take the distributions. For example, if you leave your job at 53 and then take money out when you're 56 for a second home, the penalty still applies.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."