Liquidation of 401K

[nazstar]

Moving into the new rental (fronting 3 months), and getting utilities hooked up, etc has posed some expenses beyond what I anticipated. Because of our credit, I had to put deposits with power, water and cable. Plus, I need to pay off my corporate AMEX with some personal expenses I made on it when we were broke (groceries, formula, etc). Soooooo, we are short once again. I was thinking of liquidating my 401K to tide us over until February. I know raiding retirement is VERY bad, but it would bring us even AND allow me to prepay my january and february rent. Plus, my check for my car payment bounced AGAIN. Aside from the whole issue of "don't raid your retirement", here are my concerns/questions:

#1 What do I have to show HR to prove "extreme financial need"? If I am 2 months behind on my mortgage, I would guess that qualifies but what if I ues that money to pay other bills since I'm not paying the mortgage? Ditto for backtaxes to the IRS. I owe them money but am on a payment plan.

#2 I already have 2 old loans against my 401K. What happens to these? Do they just net the vested balance and loan amounts and report the loan amount as income this year?

[HHM]

#1 The hardship issue is specific to your company's policy, but most companies take your word for it. But you would need to request the form and see if they really ask for any proof of hardship (most don't).

#2 Off the top of my head, I don't know for sure.

[needafreshstart]

Are you looking at filing bk soon, if so I believe the amount of your 401k cash out would have to be reported as income. It could then have an affect on either qualifying for a chapter 7 or increasing your payment in a chapter 13. At least that is what I was told when I was looking at taking money from my 401K, I never did so I'm not positive.

[nazstar]

Are you looking at filing bk soon, if so I believe the amount of your 401k cash out would have to be reported as income. It could then have an affect on either qualifying for a chapter 7 or increasing your payment in a chapter 13. At least that is what I was told when I was looking at taking money from my 401K, I never did so I'm not positive.

Nope. We aren't filing until August. Lawyer wants to wait until our income drops below median. My last day of work in February 28th.

[CATCHMEIFYOUCAN]

I took out a withdrawal from my 401k a month before I actually filed and trustee didn't say a thing, maybe he did? But I did mention the withdrawal was to pay the lawyer.

Catchmeifyoucan

[PhillyB]

Not sure about your plan, but the company I work for (which runs corporate 401Ks) usually require full payment on loans within 60-90 days of termination of employment.

Impressed your plan allows so many loans, mine only allows 1 per year other than a housing/downpayment loan.

At this point, I gotta say that you really should talk to your plan company. Taking out a 3rd loan when you know you're going to be terminated from employment (voluntary termination or otherwise) can trigger serious tax consequences.

On top of that. think about your current income situation, it may be more tax-advantaged to take an entire distribution right now in 2007 so you won't incur any penalty in 2008. You'll have to pay an IRS penalty + taxation if your loans are not paid, either, so it may be worthwhile to "plan" this out to spread out the eventual pain.

[Flamingo]

#1 What do I have to show HR to prove "extreme financial need"? If I am 2 months behind on my mortgage, I would guess that qualifies but what if I ues that money to pay other bills since I'm not paying the mortgage? Ditto for backtaxes to the IRS. I owe them money but am on a payment plan.

#2 I already have 2 old loans against my 401K. What happens to these? Do they just net the vested balance and loan amounts and report the loan amount as income this year?

#1 - Hardship withdrawals are usually based on company policy and certain other guidelines. Do you have a website for your 401(k) plan or a handbook given to you at the time of opening it with your employer? HR can also guide you on this.

#2 - Your two old loan balances will become distributions [the balance left on the loans at the time you close our your 401(k)]. That amount will be subject to taxes and penalty in the year of distribution. The same would occur if you had a 401(k) with an employer with a loan on it and changed jobs but could not pay back the loan. That loan would become a distribution when your 401(k) funds were switched to your new employer and subject to taxes and penalty.

When we filed for Chapter 13 in 2002, we were required to submit bank statements going back for one year with an explanation for each deposit in excess of $1,000 and each check written in excess of a certain amount. I am not certain if that changed or may have increased in amount or look back period or if it is a state thing but I would certainly investigate your situation thoroughly if you plan to withdraw those funds prior to filing. Also, you usually have to supply tax returns for the year prior to filing. All that information will be on your tax returns.