Amounts withdrawn from your 401(k) plan and used toward the purchase of your home will be subject to income tax and a 10% early-distribution penalty (if you're under age 59½).Even though the distribution will be used towards the purchase of your first home, the first-time homebuyer exception does not apply to distributions from qualified plans such as the 401(k).Your employer must withhold 20 percent of your plan balance to send to the IRS to cover income tax on the withdrawal.
) but you will be exempt from the 10 percent penalty on the withdrawal the IRS forces.
But if you were sitting on the fence about going back to school and you have the money, you won’t pay a penalty if you tap an IRA to do so.
IRAs also allow you to make penalty free withdrawals to avoid foreclosure or eviction.
Section 72(t) allows you to avoid the 10 percent penalty by spreading your income from your 401k over the rest of your life expectancy.
This can provide a nice cash cushion, though you do lose a bit of tax-deferral benefit on any amounts you take as income.