Losing job and 401k

[tez44xx]

I may be losing my job in a couple of weeks and if I do I would have to draw from my 401k account to live on. Will this be a problem?

I had my 341 last week and I would have about $16,000 to draw from on my 401K. Would the trustee try to cease it, I wouldn't have any income so this is my only source to pay bills until I find another job.

Thanks

[Flamingo]

First, do you think you are going to be fired or are you being laid off? If you are being laid off you will be receiving unemployment plus possible severance to live on. Plus you state "may" so until you have that pink slip in hand, you are still working. First, taking out 401(k) money is always the worst thing you can do cause you will be subject to state and federal taxes (20% plus) and also a 10% penalty on what you withdraw (on your federal return for the year withdrawn). So 30% or more of your funds are basically eliminated right off the bat which you could leave in there and continue to save for the future. It is your money to do with whatever you want but realize the consequences.

[tobee43]

i agree with flamingo ....unfortunately we used up our 401....which would have been protected in the bk....although it went for living and moving expenses, we certainly could have found a better use for it in our future...don't touch it....you'll be surprised at how you'll be able to manage.

best of luck to you!

[discouraged]

I agree. I could kick myself because I also used up my 401k after my severance ran out, thinking I would find a job long before it ran out. Not only did I lose some to taxes, but unemployment calculated it as income and delayed my claim until they figured I'd spent it down. So, it was definetely gone.

That was in early 2009. Since then I've had two temp jobs and that is it. How I wish I would have known that I would eventually be filing bk because it would have been exempted and still be available if I absolutely needed to use it.

Use up your unemployment before you even think about dippid into your pension. Once it is gone, it is gone and there is no liferaft left.

[AngelinaCat]

We used up 'Hub's 401k also trying to stave off the inevitable (bankruptcy) and got hit with all of the tax penalties, etc. that go with it. There's nothing like another kick to the head when you are on your way down--and this was self-inflicted.

[tobee43]

We used up 'Hub's 401k also trying to stave off the inevitable (bankruptcy) and got hit with all of the tax penalties, etc. that go with it. There's nothing like another kick to the head when you are on your way down--and this was self-inflicted.

pass that BOOT!!!!!!!!!!

[JackBondLove]

A 401K or IRA is exempt (up to around $1M), so that is not an issue. However, once you would take a distribution, the cash would not be exempt anymore, unless you could plausibly say that it was being rolled over.

The thing to do is to do a transfer of the 401K amount to an IRA. The cash goes directly from the 401K administrator to the IRA custodian, and there is no 20% taken out. (NOTE to Flamingo, the 20% is simply the amount of tax that is withheld, and would be refunded after filing the tax form, although perhaps the trustee could get his greedy little fingers on it.) Once the cash is in the IRA, you can take an early distribution, which would trigger a 10% penalty in addition to any tax for the distribution as income (if the IRA is a traditional "pre-tax" IRA with no post-tax basis.) After the filing, I took a distribution from my Roth (with no 10% penalty as the conversion to that Roth was 5 years old) and then $10K from my traditional (as well, with no 10% penalty, since I had just purchased a home after not being a bonafide homeowner for over 3 years- (i.e., new homebuyer.)

Don't let folks try to steer you away from taking a distribution if you REALLY need it. First, you should apply for the unemployment assistance - it's what your employer's taxes have already pad for! If you're down to nothing in the bank, you can easily get on food stamps. I've been on food stamps off and on for quite some time, and I've learned to cook ribeye steaks that I buy with the food stamps. You could probably get Section 8 housing assistance as well.

[daylate]

I would pay attention to Flamingo's advice. If you go through the hoops outlined above to transfer to an IRA, it doesn't really change anything. At the end of the year you will owe a 10% penalty plus taxes on the money you took out, the amount of which to be determined by your tax bracket. For 2011 singles are taxed at 15% up to 34500 of taxable income and 25% on the amount over that up to 83600. If you are married the 15% bracket goes to 69000 and the 25% bracket to 139k. So my guess is that any money you take out of either your 401k or a rollover IRA will be taxed at 15% plus the 10% penalty. Plus any state taxes. Hopefully unemployment and maybe some severance will tide you over until you find another job. One other point to consider is that you have already filed so you are in a much different boat than some of the folks above who listed their experiences. Good luck.
Also after your 341 you shouldn't have to worry about the trustee. as someone said your 401k is exempt so it will never be subject to being taken by the trustee.

[tobee43]

truely distubing thought if someone does not understand how to handle their retirement funds...

[HHM]

Downsize, downsize, downsize, before you take out money from your 401(k).

To JackBondLove, the real problem is most people, in the depths of financial crisis cannot distinguish between NEED and want. It sucks that the OP lost their job. But it sounds like they will get unemployment, so the first task is to downsize, not take a 401(k) withdrawal. Unfortunately, with the rise of lack standards, too many people treat the 401(k) as a bank. There was a time when you couldn't touch the 401(k) except for the most extreme emergency.

[discouraged]

Part of the reason I took mine out when I was let go was because it was losing a $1000 a month - back when the market got so bad. I didn't realize I could just have them go for the safest plan and I got scared. Also, for me, even though I THOUGHT I knew how to downsize, it took a while for me to really catch on that I was not going to find a comparable job - or ANY job and it wasn't until reality roared its ugly head that I re-learned how to live on less.

Sometimes I feel as if I am regressing back to the time when I had my first apartment (and I'm 57), mostly it has been a wonderful re-learning experience and I'm amazed at how far I can stretch things and do without. I actually can't imagine going back to living a higher life style anymore. I have fun now trying to live frugally.

BUT - it is a reality shock and not easy to do at first. It is what is necessary to do, just not always easy to learn quickly.

[AngelinaCat]

I may be losing my job in a couple of weeks and if I do I would have to draw from my 401k account to live on. Will this be a problem?

I had my 341 last week and I would have about $16,000 to draw from on my 401K. Would the trustee try to cease it, I wouldn't have any income so this is my only source to pay bills until I find another job.

Thanks

Before this thread gets any longer, we need to know the answer to this VERY IMPORTANT question:

Are you an Independent Contractor? If so, then most of the above replies need to be revisited--except for those saying NOT to touch the 401K. We have been assuming from what you wrote, that you are in a conventional employee/employer situation. Please clarify.

Thanks!

[tez44xx]

Thanks for all your replies.

I am not a contractor. I may be losing my job because of a prolonged medical condition that causes me to lose a lot of work. If I am terminated I am not sure I would qualify for unemployment due to the medical condition. Social Security Disability for my medical condition takes a minimum of 2 years so I would not have any income to support myself. My 401 would be my only source of income until then.

My question is how the bankruptcy courts look at a distribution if you have no other income during the 60 day wait before discharge and the 180 days after discharge.. Would the trustee try to take the money if I cash it out.

Thanks

[keepmine]

Once discharged and closed your financial affairs are your own business. The trustee would have no claim on any money from the 401K

[daylate]

I have been told that while technically the 401k is part of the bk estate, because it is exempt,as a practical matter you can be safe in using it if need be while awaiting discharge. Seems to make sense to me. I've also been told no you can't. I've also been told that you could petition the trustee for an ok to use. So my guess is that it all comes down to your trustee and your situation. If you are a no asset case and have already received a report of no distribution I would feel comfortable (as much as one can be in this situation) using it. But if i did use it, I'd dole it out in small amounts just in case there was an issue.
Good luck.