Lowering 401K Contribution to have $$$ on hand?

[Franco]

I know this might sound financially stupid. Lowering your company match to have more $$$ go into your checking account. Example, my company matches 6% and I currently contribute 6%.

Now, If I just hold off for the next 3 years, and make it 0%, this would get me around $280 per month in my checking account which would help pay bills/CH13 payments, and save some $$$ in my checking etc.

Anyone do that? It's pretty much throwing away $$$ that could be going into your 401K but the grand scheme is this, I need to have the most $$$ coming in for the situation I'm in. Plus my CH13 is over in 2023. I only have $14,000 in my 401K right now, so do you think I should just make it 0% for the next 3 years to help me through the next 3 years?

Advice is appreciated immensely.

[shipo]

I guess it depends upon how old you are; for me, in my very late 50s when I filed for Chapter 13, I was already doing 10% (company 10% match), and by the time my bankruptcy was discharged this year I was contributing upwards of 22%.

The above said, if you are still in your 20s, or maybe early 30s, you'll have plenty of time to catch up, but yeah, the $280 for 36 months means you're leaving over $10,000 on the table, and that money has a future present value of easily $100,000 or more by the time you retire.

[sophieanne]

I have to agree that your age might impact your decision, I actually did cut my contribution in half for a couple years while in my plan just to have a little extra money. Once my plan was completed I increased it back to where it was and then some. I know the advice is commonly don’t do it but I think a person has to do what is most comfortable for them.

[justbroke]

What also may impact5 this, in a Chapter 13, is whether your Trustee requires and also scrutinizes your tax returns. If you included contributions as an expense and now don't have that expense, an audit wouldn't be a good thing. However, I don't know how well Trustee's scrutinize tax returns other than total income, so my point may be moot. You must also understand the tax impact (additional withholding) and potential additional increased refund -- if any. That could also be an issue where Chapter 13 Trustees require all tax refunds.

[shipo]

Another thing to consider is, eliminating the $280 401K contribution per month withdrawn from your paycheck will not equate to an identical bump in the paycheck itself; the money switches from non-taxable to taxable so you will see something less than that.

[flashoflight]

I've looked at my own tax return and it would be hard to determine that your 401k contribution went missing. With the way TurboTax produces the PDF for the trustee, the W-2 data isn't included and there is no way to determine the Medicare wages/tax from the rest of the PDF which would be a hint that your 401k contributions went missing. In my district, it's unheard of for the trustee to initiate plan modification so you might want to ask the lawyer what is the normal practice in your district.

Normally your unsecured creditors pay all of your chapter 13 legal fees from their dividend instead of your pocket, but you have no DMI so you can't have future issues. So if you need a motion to retain funds with no DMI, you probably don't have the money to pay for the lawyer outside of the plan to file a motion. So normally I would say it's very expensive to stop the 401k due to the generous match in a COVID world, but your case's survival may someday depend on having extra money in the checking account. IMHO, it's better to fight one war rather than two at the same time. You want to retire with a nest egg and you need to get through the no-DMI chapter 13. Doing both is probably too much. Look at all the states that tried to save both lives and livelihoods and failed. Do one and keep the other at bay. The war to concentrate on is to keep the chapter 13 alive to discharge.

With unstable commission income and no DMI, I think you need to cut everything you can including the 401k. That means the guns, ammo for the range, conceal carry premiums, Netflix, etc. all have to go. Things you never would have dropped prior to BK needs to be put on the table to cut. Everything other than self-prepared meals at home needs to be on the table for cutting. Maybe get a job with more stable income too, but I know that's hard during COVID. Good luck.

[justbroke]

flashoflight I used to itemize and it's on Schedule A as a singular deduction. For those that don't itemize it is clear, especially what you wrote, that it would not show up.

[flashoflight]

justbroke I'm in California with a house and high taxes, so I am still forced to itemize. I looked at my schedule A and there are only deductions for state taxes, property taxes, personal property taxes, and "other taxes". Nothing on the form would reveal reduced 401k contributions.

[Franco]

Thank you everyone I appreciate it! I'm going to leave it at 6%, especially now that my rent is not going up, turned out to be an error in emailing residents from leasing office, what a relief!

[sophieanne]

It’s great to hear all is well that ends well 😀. Good luck going forward!

[justbroke]

justbroke I'm in California with a house and high taxes, so I am still forced to itemize. I looked at my schedule A and there are only deductions for state taxes, property taxes, personal property taxes, and "other taxes". Nothing on the form would reveal reduced 401k contributions.

You know what, I got it completely mixed up with Charitable Contributions! It would show on the W-2 but not on the tax forms. Unless someone were to get a full tax transcript, or demand paystubs, it's likely the Chapter 13 Trustee wouldn't know of the contribution.

[shipo]

You know what, I got it completely mixed up with Charitable Contributions! It would show on the W-2 but not on the tax forms. Unless someone were to get a full tax transcript, or demand paystubs, it's likely the Chapter 13 Trustee wouldn't know of the contribution.

Agreed, I played the game from the reverse perspective; I started my Chapter 13 with a 10% contribution, I ended with a 22% contribution; the net result was my net income remained within a $1,000 range for the full five years.

[flashoflight]

Agreed, I played the game from the reverse perspective; I started my Chapter 13 with a 10% contribution, I ended with a 22% contribution; the net result was my net income remained within a $1,000 range for the full five years.

I know OP is good to go, but this thread got me thinking about the myriad of ways the pre-petition 401k money can save your bacon during the 13 especially while COVID is going around. Ask your lawyer before you do any of this because I don't live in your district.

Normally, you can't access the 401k funds while employed at the company. Hardship withdrawals are difficult and slow to get with a ton of documentation requirements and it is highly discouraged to ask the trustee/court to incur debt via a 401k loan when you don't have room in your budget for another loan payment. So normally if you can't afford your 401k contributions, you cut it because surviving the 13 is more important than your retirement. But times are different with COVID.

Until 12-30-2020, you might qualify for a Coronavirus Related Distribution (CRD) up to $100k. If you qualify, you can move the 401k money to an IRA with a CRD. In California, the IRA has VERY POOR protection from judgment creditors outside BK and you push the early withdrawal date to age 59.5 instead of 55. On the other hand, you now have access to funds for the entire duration of your 13 plan and not just 2020.

In my district, the 401k/IRA withdrawal was already recognized as income during the month you earned it pre-petition or it was already counted in schedule I. The funds were exempt as wages during your 13 or exempt on the date of filing as a retirement account. The 401k/IRA balance is just like your checking account balance on payday with a few extra hoops to jump to spend it on groceries weeks, months, or years after the original payday. The CRD makes the 401k accessible this year without the annoying hardship withdrawal request and you can make it accessible forever by rolling it over to a traditional IRA this year with a CRD.

Because it is stupid easy to take 401k money out until the end of 12-30-2020 with a CRD, it may be worthwhile to grab the match even if the match is unvested until December 2020 and then stop the 401k contributions and move the vested 401k money to a more accessible IRA assuming the CARES Act doesn't get extended.