I have heard that you can roll a 401k into an IRA with no penalty. I have also heard that you can make a one time penalty free $10,000 withdrawal from an IRA for a first time home buyer. If both of these are true is this a potnetial way to get around the penalty from making the withdrawal directly from a 401k?

Buckeye Fan:

Yes, you CAN roll the assets from a 401K into a rollover IRA with NO penalty or taxes due. The 401K custodian has to do the rollover, but the custodian of the IRA will help you accomplish that.

You can get a distribution of up to $10,000 for the first-time purchase of a home without paying the 10% Early Withdrawal Penalty. You WILL have to pay income taxes (both state and federal) on the $10K, however.

Check to see if you can BORROW the money from the 401K. That is a better option than making the withdrawal and paying the tax. You have to pay the loan back with interest, but you are paying YOURSELF rather than a bank.

If that is not an option, then do the rollover to the IRA, then take the distribution under the first-time homebuyer provision. Be SURE to get your tax return done professionally to make sure it is reported properly.

One point to add to this. The rollover provision exists to provide for an employee who is forced to take a distribution from a plan upon termination of employement. You can't withdraw money from a 401K to rollover into an IRA.