401k withdrawal

[tcauvet]

I have about 10 months left on my ch 13 bankruptcy. About 3 months ago I had a rather severe car accident ( walked away without a scratch but the car did not). Anyway we lost our second vehicle, and the vehicle I use for work. So now, I am forced to drive our Land rover to work (a gas guzzler), and my wife has no car during the day. I just switched jobs, though, and have the option to withdraw my 401k to purchase a scond vehicle, but was wondering if the trustee can or would come after that money if we don't roll it over and use it to buy a second vehicle.

[justbroke]

(Just an aside question... didn't the insurance cover the old car that was totaled?)

Be very careful with using rollover money. If you don't deposit the entire amount of the "roll over" (or it's not a direct rollover), you could end up paying more than 40% in taxes on the money. That could be much worse than financing a vehicle. I would take a careful analysis of taking that distribution and using it for a car. If the amount is significant, you could see a lot of money just vanish. For example, say you have a $20K rollover, but spend $10K of it and want to deposit the other in a new IRA/401(k). Unfortunately, the entire $20K is a taxable distribution. Even if you put the other $10K in a new account, it will be after-tax. You could end up paying as much as 33% tax on the $20K ($6.67K) and an additional 10% penalty ($2K). That could be as much as $8.7K in taxes down the toilet.

I would ask my attorney if I could seek permission to take on new debt by getting a loan. Hopefully, you have been paying on time these last few years and your credit looks pretty shiny (except for the BK). I am not suggesting buying a "new" car from a dealership, but something reliable for you.

[chicagoed195]

It is generally not a good idea to incur the tax consequences of taking a distribution from a retirement vehicle and potentially incurring penalties as well; however, you need to evaluate all of your circumstances to see if it maks sense for you from a total wealth standpoint.

You should also address your question to your attorney regarding the actual distribution and how the trustee would view the receipt and subsequent use of those funds in a taxable transaction.

Justbroke is not correct as to the taxability of partial rollovers. If you took a distribution from your 401(k) plan, there would be mandatory Federal withholding of 20%. On a trustee to trustee rollover, no withholding is required. If you had an account balance of $20,000, you would receive $16,000 in a direct distribution. Within 60 days of the distribution, you could rollover any amount up to $20,000 into an IRA or another employer's 401(k) (if their plan allows) and receive the benefit of a tax free rollover.

[justbroke]

Then it was explained to me wrong and is why I have not moved some older 401(k) money around (even with a direct rollover). The fact is, that most people get that money in their hands and spend it. Ooops.

Of course, you'd still pay the penalty and the ta on the amount that you "kept". It's difficult for most people to come up with that $4K, in your example, as well as the other amounts that they will spend when they have that 401(k) check deposited into their regular checking account. This is why I'd avoid it at all co$t$.