The Tax Courts have found that a 401(k) distribution used for a first-time home purchase was subject to a 10% additional tax because the exception to the additional tax for first-time home purchases only applies to distributions from IRAs.
Distributions from qualified retirement plans are subject to a 10% additional tax, unless an exception applies. 401(k) plans are qualified retirement plans, but the tax law defines an “individual retirement plan” as an individual retirement account or annuity (commonly referred to as IRAs). 401(k) plans do not fit the definition of an individual retirement plan and therefore do not qualify for this exception.
Distributions from individual retirement accounts used for a first-time home purchase are not subject to the 10% additional tax, but distributions from 401(k) plans for a first-time home purchase are subject to the 10% additional tax.
There are very few ways to circumvent this issue from happening to taxpayers. Please contact us if you believe this situation will apply to you and would like to discuss it further.