Do i have to show what my 401K loan was used for

[LaidOff53]

While getting everything ready for 1st meeting with attorney ( 6 months bank statments - 6 months CC's statements ect...) i remembered that 15 months ago we took out a loan on our 401K for 13,000 . we paid off our truck and paid our income taxes & school taxes and then blew some of it , anyway will the trustee know this and will be have to account for every penny ?

side note :
husband is laid off now and that 401K
loan is now in default and probably reported
to the IRS as we speak !

[Flamingo]

Well, what is going to happen here is that the balance of the loan will now become a disstribution to you and you will have to report that amount on your taxes. That is going to increase your income. Make sure you bring this up with your attorney right away.

[LaidOff53]

but that was 15 months ago that money is long gone , i sure hope it wont be reported as income now . I know that i have to claim it as income on my 2009 taxes at the end of the year , but didnt know if i have to list waht the money went for 15 months ago.

[TEW]

but that was 15 months ago that money is long gone , i sure hope it wont be reported as income now . I know that i have to claim it as income on my 2009 taxes at the end of the year , but didnt know if i have to list waht the money went for 15 months ago.

You will get a 1099 from the 401 K company and get hit for the taxes. how you spent the money should not be a problem.

[eddiep]

the look back period is 6 months for income so it won't affect your median income level. I don't think they care what you spent your money on in the past as long as there were no preferential payments made. We did exactly the same thing as you, took out a loan on 401k years ago, lost job in September, could not pay back loan etc. Tell you lawyer about it, but it was not an issue for us. We have not filed yet but our lawyer was not concerned. Be prepared for the tax hit though, it was bigger than we expected! Talk to a tax consultant about whether or not you should increase your withholdings to offset this. I would hate to see you owe the IRS next year and lose your fresh start!

[LaidOff53]

Thanks , I was hoping i wouldnt have to try and remember where every cent went ! Since there is no chance of my husband being called back to that job and 4 months have passed we are able to rollover whats left ( which isnt much ) into a IRA CD through our bank , We contacted fidelity and they are going to send a check made out to our bank & us . the way i understand it fidelity will keep the Taxes & Penalty out of whats left before they send the check ( and i hope they do )

[Flamingo]

Thanks , I was hoping i wouldnt have to try and remember where every cent went ! Since there is no chance of my husband being called back to that job and 4 months have passed we are able to rollover whats left ( which isnt much ) into a IRA CD through our bank , We contacted fidelity and they are going to send a check made out to our bank & us . the way i understand it fidelity will keep the Taxes & Penalty out of whats left before they send the check ( and i hope they do )

They only will keep out taxes on that amount of money but that money added to the rest of your income for the year may put you in a higher tax bracket. You need to run the numbers so you don't get stuck owing for 2009. They also do not hold out the penalty - you will have to ensure you do that because you will get hit for it on your 2009 taxes. The penalty will be for the full amount, not the amount after taxes.