A friend of mine purchased a home last year after renting for a while. She is approximately 60 years of age. When considering how to finance the purchase, she considered two options:

  • Taking out a mortgage to purchase and renovate the house with a modest down payment
  • Taking a withdrawal from her retirement account (I believe it is a 401k) and using that to purchase the house outright and renovate it

She was hesitant to take the first option because of a less-than-ideal credit history and a desire not to be locked into another monthly payment in retirement (assuming the mortgage would have a 15+ year term). So, she went with the second option, and took a withdrawal from her retirement for approximately half of her total savings (I estimate around $60k was distributed).

Setting aside whether that in itself was a good decision, this spring she came to the unwelcome realization that she owes income tax on the large distribution, and hadn’t planned for it. Therefore, just coming up with the money to pay the income taxes she now owes for tax year 2019 will be a real hardship.

Does she have any good options here? If I had a time machine, I would go back and strongly encourage the standard home-mortgage option instead; she would be in a much better position now had she done so. Is there any means of “undoing” the distribution, for instance if she was able to mortgage the home now? I suspect that once the distribution is taken, the damage is done, but I wanted to ask the question here to see if she has any good paths forward.

  • 1
    You only have 60 days to repay any withdrawals, so the damage here is done. I think the only recourse is a HELOC and pay the taxes, or sell the home. Whoever allowed her to do the withdrawal should have informed her of the tax implications, but it's typically well known that you can't withdrawal large sums from a 401K without paying tax on it. Instead of a withdrawal, she should have done a 401k loan.
    – Ron Beyer
    Apr 24, 2020 at 14:31
  • Is she retired or still working? Apr 24, 2020 at 21:44
  • @CharlesFox She is still working, thankfully.
    – Jason R
    Apr 24, 2020 at 21:50
  • I hope 'approximately 60' means she was at least 59.5 at the time of the withdrawal, or at least the end of the year if you can fudge the date, as otherwise there is an additional 10% penalty for early withdrawal. Sep 23, 2020 at 6:47
  • @dave_thompson_085: Luckily, that was the case.
    – Jason R
    Sep 23, 2020 at 21:34

2 Answers 2


Another option to finance the tax payment could perhaps be to do a further 401k withdrawal; not ideal as it additionally accelerates the tax owed, but perhaps better than other options such as selling the house itself. Alternatively, it may be possible to reach out to the IRS to set up a payment plan for taxes owed that can be worked into a budget over the coming year(s).

  • 2
    For a nonrich person (Fed) tax on $60k is about $13k, maybe less depending on other income & deductions. For any tax debt under $50k you automatically qualify for an installment agreement of up to 6 years (if done now), and you can set it up on IRS website (which reduces the setup fee). You do pay interest at basically Treasury short market (currently negligible) plus 3%, plus half the normal failure-to-pay penalty which is another 3%, but that's still less than almost any unsecured loan you can get, though maybe not a HELOC. Sep 23, 2020 at 6:43

Depending on her income level, she may be able to make a deductible contribution to a Traditional IRA for 2019. This may partially offset the large distribution taken.

Without knowing her full situation, it is impossible to know if this is a good idea.

  • OP says she doesn't know how she's going to come up with enough money to pay the taxes. Wouldn't this require her to come up with even more?
    – TTT
    Sep 22, 2020 at 4:35

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