Hello, I am new to this forum. I'm so happy I came across it. I have a question. I just lost my job, and I am taking a lump sum of my 401(k) plan. I know this is stupid, however I need to money to move out of state where I can be with family. I would like to re-invest it in to a new home. If I use the whole amount to buy a home will I still be taxed, etc. I have already requested a check I didn't know that I could borrow against it.:( Thanks for any help you can offer.

I'm not 100% sure because I don't work in the finance field, but I believe your 401k funds are taxed before you put them in your 401k. If it's anything like my 403b (401k for teachers), I don't think the penalty amount for pulling it out before retirement is waived because you are investing in a house. I think you have to roll some of the money into another 401k to avoid the penalty. But again, I am not an expert.

Either way, I wish you the best of luck. We're in tough times and if the first bail-out taught us anything, we should know that no amount of government spending is going to fix the economy before lives are turned upside down. What you're doing isn't stupid. You're doing what you can for your family. Just don't break the 401 to buy some monster house!

Your withdrawal must be reported as regular income. It is subject to 10% early withdrawal penalty unless you rollover within 60 days to the current employer's 401(k). Read Your U.S. Tax Return: Elective Deferrals 401(k) Plans (http://taxipay.blogspot.com/2008/08/elective-deferrals-401k-plans.html)

Jamacko:

If you already have taken the money, spend what you need to move, then immediately take the rest and roll it over into an traditional IRA at your local bank. You must complete this within 60 days of the date on the distribution check to avoid taxes and the 10% Early Withdrawal Penalty.

Then, if you still need the money to buy the house (TRY to make the purchase without tapping into the IRA), you can withdraw up to $10,000 as a first-time home buyer and avoid the 10% Early Withdrawal Penalty under one of the exceptions authorized under the Internal Revenue Code.

Note that you WILL pay federal AND state income taxes and the 10% Early Withdrawal Penalty on the money you are spending for the move, and you WILL pay federal AND state income taxes on the $10,000 for the house.

The "first-time home buyer" provision applies to withdrawal from IRAs only; it does NOT apply to 401K withdrawals, which is why you MUST roll the money over into a traditional IRA.