Losing job and 401k

[Pandora]

Thanks for all your replies.

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.

Okay thats an important piece of info for you: You state that your medical condition is on the SSD list - even if it isnt and is considered a disability by definition under the ADA - you need to really look at the Amer. Disabilities Act and see if it applies to you: http://www.disabilityrightsca.org/pu...#_Toc264294451


The other area that you need to consider is that if you file BK now due to job loss, but continue to rack up debt, fees, etc until you either get SSD or find another job, will be pulling the trigger too early. Any debts incurred after the date you file will be yours and you cannot file BK again for years to come.

[Flamingo]

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.

See my highlight in red above - I was replying to what the OP initially posted as to his taking out the funds to live on and not as his moving the funds to an IRA. If he takes a disribution, state and federal taxes are taken out of the money and the OP would receive the sum. They will take out at least 20% for federal and then whatever percentage is needed for his state taxes. If they do not take out the state taxes, the OP would have to withhold them himself as they will be owed when he files his state return due to the increase of his income with that distribution. Depending upon the OP's income and tax filing status, he may or may not be entitled to a refund of those taxes; however, he will be hit with a 10% penalty by the IRS for the amount of any distribution taken in that filing year. So if he takes out the $16,000 in full, he will need to reduce that sum by $1,600, federal taxes will probably be at least $3,200 and say his state taxes are 5% that would be another $800 taken out or have to be withheld on the side so the OP would end up with a distribution of about $10,400, and the entire $16,000 would also need to be added on his tax return as income and hopefully the taxes taken out are enough to offset his tax responsibilities for that year.

When you look at reducing the $16,000 down to $10,400, you can see the loss involved and also the loss of earning money on that amount if the account were left untouched.

Again, it's everyone's own personal money and several years down the road one wonders where their head was at the time and unless one is making a lot of money, cannot make up those funds and loose that time to save towards retirement when the funds will really be needed.

[espo1357]

the first thing you should do if you lose the job, is CONVERT the 401k to an IRA, because you have more options with the Personal IRA.

Also, consider a loan off the 401k if you are still working, and use the max (usually 5 years) to pay it off. So, if you take an 8k loan (the usually let you take up to half of your 401k, 50k max, out...so, you would pay about 140 bucks a months for 60 months to pay it off. If you lose the job, then you can still pay it off OR if you can't pay it, it defaults, and you pay it in taxes. But, you will have less income because you lost your job, and you will have a lower income bracket, so it works good. Also, it buys you time.

I would just pay it off, little by little. That is how true wealth is created anyway, right? little by little?

Anyway, I am sorry to hear about your situation, but hang in there.

Find some work, anything. If you have a medical condition, file for disabilty. Get your options in order and let us know how we can further help!

Good luck!

[ValleYum]

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

Is your employer too small to offer FMLA for you to use?

[tez44xx]

Is your employer too small to offer FMLA for you to use?

No they can offer FMLA but that only protects my job it does not pay you an income. I have exhausted all my vacation & sick leave so I will be down to zero funds to pay my bills until I can get my health back on track. My 401K would be the only option. I just didn't know if I had to wait to be discharged or if I could withdrawal my funds while waiting to be discharged.

[JackBondLove]

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.

You can take a distribution the day after filing, and that cash would be yours - and if the trustee were to ask where it came from, you would have a paper trail.

[keepinitreal]

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.

We can add our names to the list of people who took a hardship withdrawal of our 401(k) after being laid off, and now realize we didn't have to. All we did was delay the downsizing, downsizing, downsizing.

[tobee43]

..............and MORE downsizing

if we can just look through a different set of eyes on that word and it's meaning. i also think the word "downsizing" needs to be viewed as a positive phase.

here's the GREAT thing about downsizing:

more affordable in many ways such as, less on utilities, it's always been time for that diet, so also, time to maybe "downsize" yourself personally..LOL!!! less maintenance and upkeep. gives you more time to do the things you really want to. and, of course have to mention learning to SAVE!

one can really sleep at night when then KNOW they can wake up and smell the roses adn the coffee and they are both paid for!

[HHM]

Well, we can probably brain storm a "better word" for the concept (right-sizing,etc)

[tobee43]

Well, we can probably brain storm a "better word" for the concept (right-sizing,etc)

LOL!!! really i like that phase "right-sizing" now, doesn't that sound more uplifting and encouraging? people really need to chance their mindsets and goals and learn this is not a bad thing!

let me try this out now...ok

i'm going to right-size my closet so that everything fits
i'm going to down-size my closet so that everything fits

it WORKS!!!!!! LOL!!!!!!