Covid Withdraw from 401k

[manicmike]

My spouse had a very small 401K, under 15K. She had several medical bills that have piled up during our plan. And she took a COVID withdrawal from her 401K, not a loan, but a withdraw (I realize this was not smart in the long run, but that's what she did). She used the money to keep the medical bills from going into collections. She could do this because during the beginning lockdowns, she was laid off. However, we never considered the fact that that would be disposable income. Now that we are looking over our income tax documents, we have figured this out. Sigh...so my question is before I contact our attorney about this.... will they dismiss our case for this?

We are already considering voluntarily dismissal, (for other reasons) but now I'm thinking we will get kicked out anyway...Does anyone have any insight about this?

Thanks Mike.

[sophieanne]

Hi..I day talk to your attorney and see what he or she says. The cares act put the withdrawals in place to help people through these difficult times. You probably should have asked your attorney before doing it, but I don’t believe you’ll be dismissed for having done it. On another note, just remember that the amount you took can be split over three years, so you’re not paying taxes on it all at once. I don’t know if it would ever be an option for you but you also have three years in which you can pay back the withdrawal. It doesn’t have to be done all at the same time, it can be paid back over the three years. Just thoughts. Never panic until you talk to your attorney first. I hope it all works out for you.

[flashoflight]

401k money is money that she earned long ago with the tax consequences deferred. It's not current disposable income. Only the tax consequences are today. But it depends on local rules. IMHO, it's not disposable income but you have to struggle with paying the taxes. If you fail to pay the taxes, you can be dismissed. The covid 401k withdrawals can have the tax spread over three years so do that if you need to.

Think about it.... a pre-petition 401k loan that defaulted this year isn't disposable income this year. The only thing left is the tax consequence for defaulting on the 401k loan. The tax you must pay or you will get thrown out of the 13.

These covid 401k withdrawals are very strange because you can repay the 401k by rolling it over to an IRA over the next three years and it will be as if the withdrawal never happened.

So it never made any sense to count exempt 401k money withdrawn as disposable income. Most people can't access that money due to the prohibition of loans in a 13 without court permission and due prohibition of in-service withdrawal.

So talk to your attorney.