401K loan default question

[LaidOff53]

14 months ago we took a 13,000 loan from hubby 401K account ( fidelity ) at this work , we paid off the truck paid income tax and property taxes and paid off a credit card and made some home inprovements , $125.00 was withheld from his paycheck biweekly , We knew that if it wasnt paid it would be considered a withdraw and we'd face tax & penalty , Well He was laid off 4 months ago so he has been making a check out and giving it to his employer to make the payment , 2 weeks ago we were told his Layoff was permanent and we were not able to continue to make the payments through his employer , we called fidelity to see if we could continue to make the payment and leave the money in that 401K , We were told NO that since he is no longer employed there we have to take whats left out and either roll it over into IRA ect.... or take the cash , He told us that if we do not pay back the loan we took out last yr right now it would be considered in default and taxed with penalty. they are sending us paperwork to sign and when we recieve the ck we are going to roll over what is left into a IRA CD at our bank ,There is NOWAY we can pay back 10,500 so we know that the IRS will be notified and that loan will now be a withdraw,
so here is my question :
since it was taken out 14 months ago and that money is gone will that affect us filing ch 7 now ? That money was used to pay things last yr , but by us defaulting now it will appear on this yrs income , anyone know how this will affect us filing ? lordy i hope it does not have to be figured in as income NOW !! That money is long gone and the only reason its not being paid back is that my husbands 401K does not permit monthly repayment when he is not an employee , It was pay back all of it or nothing .

[AngelinaCatHub]

WARNING, WARNING, WARNING!!!

Do NOT take a check. DO NOT even hold the check. You MUST do a direct transfer from institution to another institution. IF you take and even touch that check, you will be taxed on the whole amount. You will have broken the 401K. Have them open you a personal account as an IRA if you like Fidelity, or thave them transfer it to Merrill Lynch or other place but PLEASE to not accept a check from the 401K. 'Hub

[mintz]

I totally agree with Hub, I recently moved my 401k to an IRA last week just so I can have access to some cash

[Flamingo]

Hub is correct - what happened to you is that when you leave your employer and you have a loan on your 401(k), if the loan is not paid off the loan will be treated as a distribution to you for that tax year. That means the amount of the loan not paid will be treated as income to you. No 401(k) permits a former employee to keep paying on a loan when not an employee.

You need to immediately open another IRA account at a bank and immediately work to get the balance left transferred to that new IRA. The former employer can either direct send the funds to the new IRA but what is usually done is a check is sent (in your name(s) and the name of the new institution) to you for you to sign and give to your new account holder. That avoids the taxes and penalties. If you take a check from them in your name only, you are taking a full distribution of your 401(k) account and will be slapped with taxes and penalties.

Move quicklly on this one or you are going to have a mess. Best of luck to you!.

[fltoo]

If you take a check from them in your name only, you are taking a full distribution of your 401(k) account and will be slapped with taxes and penalties.
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Yes, but if by chance the check is your name only, all is not lost. You still have 60 days to reinvest the money into a retirement fund, but you must replace the amount the company took for taxes and penalties out of personal funds and reinvest the entire original amount.

[Flamingo]

If you take a check from them in your name only, you are taking a full distribution of your 401(k) account and will be slapped with taxes and penalties.
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Yes, but if by chance the check is your name only, all is not lost. You still have 60 days to reinvest the money into a retirement fund, but you must replace the amount the company took for taxes and penalties out of personal funds and reinvest the entire original amount.

fltoo is correct but I did not list full info in my posting cause one can type forever with all sorts of stuff as to this...what I do want to add is to obtain information as to what to do from the holder of your present 401(k). Call them and they can give you instructions/timelines or they may have it on their website where you go to look up your account information. Best of luck you!

[fltoo]

WARNING, WARNING, WARNING!!!

Do NOT take a check. DO NOT even hold the check. You MUST do a direct transfer from institution to another institution. IF you take and even touch that check, you will be taxed on the whole amount. You will have broken the 401K. Have them open you a personal account as an IRA if you like Fidelity, or thave them transfer it to Merrill Lynch or other place but PLEASE to not accept a check from the 401K. 'Hub

Hey Flam, just wanted to clear that up because these blanket, hardcore statements like the one I quoted above make people think that there are no other options and scares the hell out of people.

[Flamingo]

Hey Flam, just wanted to clear that up because these blanket, hardcore statements like the one I quoted above make people think that there are no other options and scares the hell out of people.

I understand...the best thing anyone can do in a situation like this is to get information straight from the holder of their 401(k) account or contact their HR Dept. for instructions. Most 401(k) account holders (i.e., T. Rowe Price, etc., etc.) have all the information needed online and can help everyone via phone or email that has an account with them. It is a scarey situation to be in if there is a large loan and one loses their job and does not have a new employer on the horizon. As in everything, the deadlines can pose a big problem.

[LaidOff53]

I told fidelity i wanted them to deposit it into an IRA we have set up at our bank last week and they said that they could only send me a Check made out to us & our bank so we should be okay on that , but what i am worried about is 14 months ago we took a 13,000 loan on that 401K ( while hubby was still employed there ) and since we cant pay back that loan will it show up as a withdraw now , we are filing in approx 2 months and i was wondering will we have to claim that 10,000 as income when we file ch 7 in a couple of months ? That money is long gone 14 months ago when we received it , but i know that fidelity will now notify the IRS its a withdraw , will it say it was from 14 months ago? Or will it look like we just took out a withdraw. I hope i havent confused everyone, im having a hard time explaining what i mean

[deadbroke99]

That shouldn't count on your means test because you did not receive it within the last 6 months. Your bank statements will prove that.

[LaidOff53]

whew !!
thanks broke , Im doing everything i can to keep the monthly the income down to quailify for chapter 7 , geez that sounded bad but you know what i mean :-)