She’ll Need $10,000 to Close on a Home at 62. A Seller Credit Will Spare Her a $12,821 401(k) Withdrawal and $2,821 in Federal Tax
A seller offers to cover her closing costs, and the savings go far beyond the dollars on the page. Hidden costs tied to Social Security and Medicare make pretax retirement cash pricier than it looks, and a price cut tells…
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A 62-year-old buyer is under contract on a house and needs $10,000 for eligible closing costs. She planned to pull the cash from her traditional 401(k). Then the seller offered to pay those costs instead.
That offer is worth more than its face value. Cash from a pretax 401(k) comes with a tax bill attached, so a seller credit covers both the $10,000 and the tax she would have paid to free it up.
Why Skipping This Withdrawal Saves More Than $10,000
At 62, she is past age 59½, so she avoids the 10% early-distribution penalty. She still owes ordinary income tax. Withdrawals from her traditional 401(k) are generally taxable in the year she takes them.
Assume she’s single and the entire withdrawal falls in the 22% bracket, which starts above $50,400 of taxable income in 2026.
She would need to withdraw about $12,821 to keep $10,000 after federal tax. Every $1,000 she needs costs her about $1,282 from the account.
Withholding can trip her up. Under federal tax rules, the plan generally must withhold 20% when it pays an eligible rollover distribution directly to her. That 20% is only a prepayment toward her federal income tax. Because her entire withdrawal falls in the 22% tax bracket, she’ll owe the remaining 2% when she files, plus any state income tax.
Her $2,821 Federal Tax Bill Disappears With the Credit
When the seller covers closing costs, the full $12,821 stays invested and the $2,821 federal tax never happens. For a retiree, that is money that keeps compounding in the account and stays off her tax return.
The extra income can also cost her elsewhere. If she has already claimed Social Security, part of her benefits becomes taxable once provisional income (roughly her other income plus half her benefits) passes $25,000 for a single filer. Each 401(k) dollar above that line can pull more benefits into taxable income, so her real marginal rate ends up above 22%.
Medicare comes next. Premiums are set using income from two years earlier. Her income at 63 will set her first premiums at 65.
For 2026, a single filer with modified adjusted gross income (MAGI) above $109,000 pays an extra $81.20 a month for Part B. The thresholds will differ when she turns 65. IRMAA is one of several premium traps tied to income from two years ago, and we mapped the rest in a free Medicare guide here.
What a Seller Can Legally Pay at Closing
Seller credits can go toward closing costs and prepaid items: lender fees, title, escrow, and prepaid taxes and insurance. Seller credits can’t cover her down payment. Each loan program also caps the credit:
- Conventional: 3% of the price with less than 10% down, and 6% with 10% down or more.
- Conventional with 25% down or more: 9%.
- FHA: up to 6% of the sales price.
- VA: concessions up to 4% of appraised value, and ordinary closing costs don’t count toward that cap.
Lenders cut any credit that tops her actual costs, so she should ask for an amount that matches her Loan Estimate.
A Lower Price Looks Similar but Pays Out Over 30 Years
The other option is $10,000 off the price. With an example 20% down payment, that saves her $2,000 at closing and lowers the loan by $8,000.
At an example 6.5% 30-year rate, the payment drops by about $51 a month, or roughly $18,200 if she keeps the loan for the full term.
The price cut also frees up $2,000 of her down-payment cash for closing costs. She’d still need $8,000, requiring about $10,256 from her 401(k) and generating roughly $2,256 in federal tax. The credit gives her more relief at closing, while the price cut lowers her mortgage payments over time. Which offer saves her more depends partly on how long she keeps the loan.
How to Put a Seller Credit to Work
- Size the request from your Loan Estimate. Add up eligible closing costs and prepaids, and ask for that amount, staying within your program’s cap. Anything above actual costs gets cut.
- Gross up any remaining withdrawal. If the credit falls short, plan on about $1,282 from the 401(k) for every $1,000 you need in the 22% bracket. Set aside cash for the gap between the 20% withheld and your actual tax bill.
- Check your income against two lines before you withdraw. Compare provisional income with the $25,000 Social Security base, and check your modified adjusted gross income (MAGI) against the Medicare income-surcharge (IRMAA) thresholds that will apply when you enroll.
Sellers sometimes build credits into the asking price, so the offer isn’t necessarily free. Compare it with the price cut, count the tax you’d pay to pull cash from pretax savings, and then sign.
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Gerelyn Terzo is the author of dividend investing handbook "Dividend Investing Strategies: How to Have Your Cake & Eat It Too." A veteran financial journalist, she covers agri-finance for outlets like Global AgInvesting and the broader stock market and personal finance for 24/7 Wall Street. She began at CNBC and later helped launch Fox Business in New York. Gerelyn currently resides in Woodland Park, Colorado and dabbles in nature photography as a hobby.
