My husband died in 2006, he had a 401k with me (spouse) as his benificiary. We have 2 young sons and I cashed out the 401k to use for the down payment of a primary residence. All of the paperwork has not been done, but I will get all of the papers in order during 2007. Is there a certain amount of time that I have to reinvest the 401k before I have to pay a lot of taxes on it? Please let me know.

Thanks
Karen

Karen:

If you have NOT cashed out yet, a BETTER way to handle this is to roll the 401K over into a rollover IRA.

Once that is done, you can then take the distribution from the IRA and probably claim the First Time Home Buyer exception on up to $10,000 of the distribution. The money will still be subject to federal and state income taxes, but the first $10,000 will be exempt from the 10% Early Withdrawal Penalty.

The First Time Home Buyer Exception does NOT apply to 401K distributions.