NEVER, EVER cash out a 401K early!!

[Help!]

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

The gross distribution was included as income, but the taxes taken out were included as an expense on the means test. It does not count as income on the means test if it was more than six months ago, and the only time I've seen cases where the UST has looked further into the past was for a "totality of circumstances" argument. So - you're fine as far as BK income, just brace yourself for the income tax consequences.

[fltoo]

This is reaching it HELP, but did you have any unusually high medical or dental bills for the tax year? They can offset the withdrawal.

[Help!]

Yes, fltoo, we did - but because the 401K distribution was such a huge amount we'd need over $15,000 in medical expenses to begin to use the deduction. We had about $10K, a lot - but not quite enough. Good thinking, though.

[AlreadyFiled]

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!!!

I also did the same thing except I withdrew the $50k (thru QDRO 401k) to put the net amount as a downpayment on a house. Was necessary at the time and knew the consequences to withdrawing it (thankful I did tho, it got me and my children in a house).

At the time I had an interest only loan thru 2008 on my old house in which i received my interest pmt info to file this year. (was well over $11k paid in interest on that home (surrendered) and paid about $5k on the current home) so I'll be able to write off $16k in interest on the homes plus 2 children (child tax credit) and also have a few other write offs...

I did a run through on turbo tax and before I entered my 401k forms i was getting about $7k refunded...then i entered the 401k withdraw info and it brought it down to $2k return (but not owed)

Do you owe so much because you didnt have enough interest in your home to write off??

just curious.... your withdraw was the same as mine...

[Help!]

I also did the same thing except I withdrew the $50k (thru QDRO 401k) to put the net amount as a downpayment on a house. Was necessary at the time and knew the consequences to withdrawing it (thankful I did tho, it got me and my children in a house).

At the time I had an interest only loan thru 2008 on my old house in which i received my interest pmt info to file this year. (was well over $11k paid in interest on that home (surrendered) and paid about $5k on the current home) so I'll be able to write off $16k in interest on the homes plus 2 children (child tax credit) and also have a few other write offs...

I did a run through on turbo tax and before I entered my 401k forms i was getting about $7k refunded...then i entered the 401k withdraw info and it brought it down to $2k return (but not owed)

Do you owe so much because you didnt have enough interest in your home to write off??

just curious.... your withdraw was the same as mine...

We owe so much because our total taxable income is so artificially high that about the only thing we could deduct was mortgage interest. Since we stopped paying the mortgage early last year, that was a small amount. When we relocated, our moving expenses (huge) were reimbursed and this was also added in as income. All of the deductions we used to have, like student loan interest, child tax credits, childcare expenses, etc. vaporized because of the tax bracket we ended up in.

[AlreadyFiled]

We owe so much because our total taxable income is so artificially high that about the only thing we could deduct was mortgage interest. Since we stopped paying the mortgage early last year, that was a small amount. When we relocated, our moving expenses (huge) were reimbursed and this was also added in as income. All of the deductions we used to have, like student loan interest, child tax credits, childcare expenses, etc. vaporized because of the tax bracket we ended up in.

I don't understand how you can lose your child tax credit? That doesn't make sense to me. Is this true?

[Flamingo]

I don't understand how you can lose your child tax credit? That doesn't make sense to me. Is this true?

The Child Tax Credit reduces taxes owed and therefore could be part of or all of a refund. Look on the back of your 1040 or 1040A to see how all that works.

[AlreadyFiled]

so because they owed $12,000 to the IRS they probably really owed $14,000 (pretending they had 2 children) so it reduced it $2,000?

Is that what you mean by 'lost' cuz you owed so much?

[Help!]

No, once your income reaches a certain level (which ours did because the 401K cashout), you are not allowed *any* child tax credit at all. At this level, you are also no longer able to deduct student loan interest paid and the amounts you are permitted to deduct for other things become smaller. It's all about the tax bracket you fall into.

[eddiep]

You are right, I know what you mean. The child tax credit is only available if you income is under a certain amount.

[AlreadyFiled]

Okay that makes sense, thank you for sharing with us.