[Venezial]

I am 50 Years old with a wife and 3 kids and in desperate need to update my house. I am considering a substantial withdrawal (over 100K) from my 401K that I have been contributing into for near 25 years.

Question 1 - My company allows regular withdrawals of after tax contributions and associated earnings. Presumably I will have to pay capital gains tax plus the 10% penalty. How are the capital gains calculated? After completing the construction of course my house will be worth more. When I sell I will have to pay cap gains again - double taxation?

Question 2 - Since I am putting the money into my primary residence and of course I consider that just another retirement vehicle... Is there any way to avoid the penalty? Any place to plead the case?

[ebaines]

I am 50 Years old with a wife and 3 kids and in desperate need to update my house. I am considering a substantial withdrawal (over 100K) from my 401K that I have been contributing into for near 25 years.

Question 1 - My company allows regular withdrawals of after tax contributions and associated earnings. Presumably I will have to pay capital gains tax plus the 10% penalty. How are the capital gains calculated? After completing the construction of course my house will be worth more. When I sell I will have to pay cap gains again - double taxation?

Question 2 - Since I am putting the money into my primary residence and of course I consider that just another retirement vehicle... Is there any way to avoid the penalty? Any place to plead the case?

I think the use of the term "capital gains" as it applies to the earnings on your after-tax contributions is incorrect - the earnings on the money you take out on your after-tax contributions will be taxed at your normal income tax rate, not as capital gains. The amount of these earnings simply the excess of their current value over the after-tax money you contributed. Your statement or your administrator should show you what the sources of funds are in your account, including your pre-tax and after-tax contributions and any company contributions.

When you sell the house the capital gain is the difference between the sell price (after selling expenses) and the amount you put into it, meaning the purchase price + cost of capital improvements you've made over the years. Also, you will not have to pay taxes at all if the capital gain is the less than $250K ($500K for a married couple) - assuming you have owned the house and it's been your principal residence for at least 2 out of the previous 5 years. If you do owe capital gains, I do not understand your question about double taxation - please explain.

I know of no way to "shelter" 401(k) money in your residence - once it's paid out by the plan adminisrator it is a distribution and you get nailed with the taxes and penalty. You can't do it through an IRA either. Sorry.

One last point - have you thought through taking out a home equity loan from your bank, which would allow you to keep your money in the 401(k) and give you a nice tax deductiuon? Or failing that, a loan from your 401(k) rather than a distribution?

[AtlantaTaxExpert]

Ebaines covers it rather well.

Better for you to get a home equity loan. The taxes and 10% early withdrawal penalty will eat you alive.