We recently built a house and needed some cash, so I dipped into my 401k for it. What do I need as proof for using the money for the construction. Also, my bank withheld the tax money. So how do we file with that?

What do you think that proof will get you?

Its not going to change the tax liability or penalty on the withdrawal.

You do not need any proof regarding what the money was used for - it doesn't matter. The bank is required to withhold 20% for taxes. They will send you a 1099-R form that lists the amount of the withdrawal and the amount withheld. You report the distribution as follows:

1. You report the full amount of the withdrawal on line 16 of your 1040 - "Pensions and annuities."

2. You include the 10% early withdrawal penalty on line 60 of form 1040 - "Additional tax on IRAs, other qualified retirement plans, etc."

3. The amount that was withheld for taxes you report on line 64 - "Federal income tax withheld from Forms W-2 and 1099."

What Scott and ebaines said is correct.

Unfortunately, you made a common mistake: you assumed that withdrawing money from your 401K for the first-time purchase of a home makes you exempt from the 10% Early Withdrawal Penalty.

That is true ONLY IF the withdrawal is from a traditional IRA. It does NOT apply for withdrawals from 401Ks.