At 62, a Seller Credit Could Save Her From a $12,821 401(k) Withdrawal and $2,821 in Federal Tax

A seller’s offer to pay her closing costs does more than trim the amount due at settlement. By avoiding a pretax retirement withdrawal, she also sidesteps tax effects that can ripple into Social Security and Medicare.

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A 62-year-old buyer has a home under contract and needs $10,000 to cover eligible closing costs. She had planned to take the money from her traditional 401(k), but the seller is now offering to cover those costs instead.

That difference is bigger than it first appears. Money taken from a pretax 401(k) is taxed when withdrawn, so a seller credit can replace not only the $10,000 she needs at closing, but also the tax bill she would have faced to get that cash out.

Why Avoiding the Withdrawal Saves More Than the Amount of the Bill

Because she is older than 59½, she does not face the 10% early-withdrawal penalty. Even so, distributions from a traditional 401(k) are generally subject to ordinary income tax in the year they are taken.

Assuming she is single and that the entire withdrawal is taxed in the 22% bracket, she would need to take out about $12,821 in order to net $10,000 after federal tax.

That means every $1,000 she needs effectively costs about $1,282 from the account.

Federal withholding can also complicate matters. When a plan pays an eligible rollover distribution directly to the participant, it generally withholds 20% for federal taxes. That amount is only a prepayment, not the full tax due. Since her withdrawal would fall in the 22% bracket, she would still owe the remaining 2% when she files, plus any state tax.

The Seller Credit Eliminates a $2,821 Federal Tax Cost

If the seller pays the closing costs, the full $12,821 stays invested and the $2,821 federal tax bill never materializes. For a retiree, that money remains in the account to keep growing instead of being lost to taxes.

There is another potential benefit. If she has already started Social Security, additional income can make more of her benefits taxable once provisional income — generally other income plus half of Social Security benefits — rises above $25,000 for a single filer. In that case, each added 401(k) dollar can push more benefits into taxable income, making the effective tax rate higher than 22%.

Medicare can also be affected. Premiums are based on income from two years earlier, so income at 63 would help determine her first premiums at 65.

For 2026, a single filer with modified adjusted gross income above $109,000 pays an extra $81.20 per month for Part B. The actual thresholds will be different by the time she turns 65. IRMAA is one of several income-related premium surcharges, and a free Medicare guide can help map the rest.

What a Seller Is Allowed to Cover at Closing

Seller credits may be used for closing costs and prepaid items such as lender fees, title charges, escrow expenses, and prepaid taxes and insurance. They cannot be used for the down payment. Each loan program also limits the size of the credit:

1. Conventional: 3% of the price with less than 10% down, and 6% with 10% down or more.
2. Conventional with 25% down or more: 9%.
3. FHA: up to 6% of the sales price.
4. VA: concessions up to 4% of appraised value, with ordinary closing costs excluded from that cap.

Any credit above her actual eligible costs will be reduced by the lender, so the request should match the figures on the Loan Estimate.

A Price Cut May Look Similar, but the Savings Work Differently

The alternative is a $10,000 reduction in the purchase price. With a sample 20% down payment, that would save her $2,000 upfront and reduce the loan amount by $8,000.

At an example 6.5% rate on a 30-year mortgage, the monthly payment would fall by about $51, which adds up to roughly $18,200 over the full loan term if she keeps it that long.

A lower price also frees up $2,000 of her down-payment money to use for closing costs. Even so, she would still need $8,000, which would require about $10,256 from her 401(k) and create roughly $2,256 in federal tax. The credit helps more at closing, while the price cut reduces the mortgage payment over time. Which one is better depends in part on how long she keeps the loan.

How to Use a Seller Credit Strategically

1. Base the request on the Loan Estimate. Add up eligible closing costs and prepaids, then ask for that amount while staying within the program cap. Any excess will be trimmed.
2. Adjust any remaining withdrawal upward. If the credit does not cover everything, budget about $1,282 from the 401(k) for every $1,000 needed in the 22% bracket. Keep cash ready to cover the gap between the 20% withheld and the actual tax due.
3. Check the income thresholds before taking money out. Compare provisional income with the $25,000 Social Security base and compare modified adjusted gross income with the Medicare IRMAA thresholds that will apply when coverage begins.

In some cases, sellers build the credit into the asking price, so it is not always a pure bargain. She should compare that offer with a price cut, include the tax cost of tapping pretax savings, and then decide whether to proceed.