NEVER, EVER cash out a 401K early!!

[Help!]

Before considering BK, we cashed out our 401K as many people do when they're desperate for money. We knew we'd pay income tax on it + the 5% penalty, so we had what we thought was a reasonable amount (20%) withheld from the check. What we didn't realize is that the $50,000 we cashed in (that netted us only $37K) would also be added to our household income as if it was another giant paystub. We are now not able to deduct student loan interest or childcare expenses and we lost ALL of our child tax credits. Because we didn't pay much in mortgage interest and we are also in a *much* higher tax bracket, we are completely screwed this year. Even with $6000 in charitable contributions we owe the IRS $12,000. Having emerged from Ch. 7 with everything of value surrendered to the trustee, we have no way to pay this. So, back in debt we go... this time to the IRS.

I know many of you who are much more financially savvy than I am are thinking "DUH!", but for anyone who is lurking and is considering using their 401K to avoid filing BK... DON'T!!!

[BnkrptcyLwyr]

Before considering BK, we cashed out our 401K as many people do when they're desperate for money. We knew we'd pay income tax on it + the 5% penalty, so we had what we thought was a reasonable amount (20%) withheld from the check. What we didn't realize is that the $50,000 we cashed in (that netted us only $37K) would also be added to our household income as if it was another giant paystub. We are now not able to deduct student loan interest or childcare expenses and we lost ALL of our child tax credits. Because we didn't pay much in mortgage interest and we are also in a *much* higher tax bracket, we are completely screwed this year. Even with $6000 in charitable contributions we owe the IRS $12,000. Having emerged from Ch. 7 with everything of value surrendered to the trustee, we have no way to pay this. So, back in debt we go... this time to the IRS.

I know many of you who are much more financially savvy than I am are thinking "DUH!", but for anyone who is lurking and is considering using their 401K to avoid filing BK... DON'T!!!

This is exactly the reason that I tell people that you should actually talk to a bankruptcy attorney FIRST!

A good bankruptcy attorney can tell you what to do, what not to do, what to liquidate, what not to liquidate, when to liquidate, etc.

Sadly, people think bankruptcy is the LAST option. It may be that you want to avoid it ... sure ... but the person to actually talk to FIRST is the bankruptcy attorney because bankruptcy can often be PLANNED ... and the reason that it needs to be PLANNED is so that you don't go and get rid of 401k's (which are fully exempt assets) and piss it away on catching up on credit card or even mortgage debt. You may need that asset later!

Help!, I'm sorry to hear that you learned the hard way.

[vicmost]

"The Hard Way"

Hindsight is 20/20!
I found myself unemployed in 2007 and I was in the middle of a room addition / kitchen remodel at the time...My family was using the garage as a make shift kitchen!
I ended up taking out a 100k to finish the job while supporting myself...I did find work eventually but I only earned 19k for the year (previous year I made 85k)...I thought that I wouldn't have to pay to much in taxes because I was unemployed...WRONG!
In 2008 I had to pay $25k in taxes! I then finished off my 19k of 401k savings to cover the taxes...(The rest I covered with credit cards)....
To sum it up I lost all of my 401k ($134k) and I'm now facing bankruptcy I'm close to losing my house as well! Now I will probably end up with nothing!

DON"T DO IT!
LEAVE YOU'RE 401k ALONE!!!

[albacore44]

Well I tapped mine for $45K last March on a loan to myself to pay off some CC's before I admitted to myself how deep a hole I had dug myself into. now i'm paying myself back, but wife lost job in november, and I had my hours cut.

So I'm paying myself back with interest, but i could sure use that extra take home right now.

[keepmine]

I'm gonna post a text of this link in the news section but, a heck of an article by a well known financial planner.

http://www.newsweek.com/id/177749?GT1=43002

The right time to go bankrupt is when you're financially stuck but still have assets to protect.

and

It's a mistake to tap your retirement accounts to make minimum payments on monstrous bills. IRAs and 401(k)s are largely protected in bankruptcy, as is most of your child's 529 college-savings account. This money is your future. Leave it alone and use credit cards for your necessities. Card issuers know that some of their customers will fail. That's why they charge elephant fees.

Somebody beat me do it.

http://www.bkforum.com/showthread.php?t=32807

[Trixie007]

Oh, Help! That is tough! I hope that 2009 is a better year for you. While hindsight can sometimes be our friend in future decisions, I would not use it as a club on yourself. Many have done this - we did it too...

[Flamingo]

What everyone in financial difficulty needs to know is that when you get to the point of considering robbing Peter to pay Paul (i.e., thinking about touching your 401K to pay the bills, taking cash advances from one credit card to pay the other), that is your flashing neon light warning sign that you have started the downward spiral to BK. If you foresee no way out (say with a new job in a few weeks if your job was lost), do not touch 401K funds as those funds are exempt. Many, many make that mistake (as we did also with my husband's) prior to filing and realize too late they could have held onto those funds. We were given bad advice on another forum several months before we even considered filing BK and we utilized my hubby's 401(k) in the hopes of staying afloat while he pursued his job search. What a mistake that was.

[eddiep]

Was the amount you cashed out counted as "income" in your bankruptcy, please say no or we are in bigggg trouble! I haven't filed yet but we fall under the median income level but we did cash out our 401k.

[Help!]

Was the amount you cashed out counted as "income" in your bankruptcy, please say no or we are in bigggg trouble! I haven't filed yet but we fall under the median income level but we did cash out our 401k.

Sorry, but yes - it was included as income (just as it is on income taxes)... despite what our lawyer told us. The only reason we were able to get through our Ch. 7 was that all of the money went into purchasing vehicles with cash, which preserved the value in the form of assets (which we surrendered).

[eddiep]

I checked, the 401k cashout was in early August, not within the 6 months prior to filing, (probably March 1st filing date). And it was for $9000. Am I in the clear on this one?

[eddiep]

I know they took alot in taxes, is it the pretax amount they counted as income in bk?

[lrprn]

I checked, the 401k cashout was in early August, not within the 6 months prior to filing, (probably March 1st filing date). And it was for $9000. Am I in the clear on this one?

I answered your question here in your other thread, Eddie - http://www.bkforum.com/showthread.php?p=236672#poststop (No, if you file March 1 or after, then August is outside your six-month look-back window and the $9K isn't added into your gross income figure for the Means Test.)

Please don't post the same quesiton in more than one thread at a time, EddieP. That's against our forum rules. Thanks!

[eddiep]

sorry I posted this and then thought about the other deposits. Thanks though, I did not add this to my means test. Will check that. We were way under, hopefully this dosent put us over.

[eddiep]

I am still under the median income level for the state, thank you for the advice.

sorry I posted the same question twice.

[fltoo]

So sorry HELP, that is a tough situation.

Unfortunately, I think we all tend to try to pay bills with any money we can get before we even THINK of BK. Telling people to not cash in retirement funds on this forum is like closing the barn door after the horse leaves.

I cashed out my SEP account and 3 old insurance policies, but being self employeed I had enough business expenses to offset the income.

I am financially savvy and I didn't think DUH. Why would anyone who doesn't need it, have BK savvy? Last thing in the world I would think I ever needed to know about.