Need opinions/advice regarding 401k early withdrawal with no penalty...

[cupcake]

First off, I want to say that I am fully aware of the general consensus on the board regarding withdrawals from 401k accounts. My situation deals with a withdrawal of sorts, just not a standard early withdrawal.

I was divorced in December, 2008; filed for CH7 BK in February; and received my discharge in July, 2009. We are in the final stages of getting the qualified domestic relations order (QDRO) worked out, which will transfer just over half of the balance of my ex's 401k to me, pursuant to our divorce judgment. I have my own 401(k) account to which I invest 10% of my annual pay.

Per the Internal Revenue Code, I have a one-time opportunity to take an early withdrawal of all or a portion of this money without having to pay the 10% early withdrawal fee because the transfer is being made pursuant to a QDRO. I will still have to pay income taxes on any portion I don't transfer into another retirement account, just not the penalty.

Considering my current financial situation, I'm having a difficult time deciding what to do. Part of me thinks I should take advantage of this opportunity and take some of the cash so that I have a decent emergency fund/cushion. I'm single and have nobody else to fall back on but myself. If I lose my job, I've got nothing and nobody. The other part of me thinks I shouldn't touch this money, pretend it never exixted, and roll it into a retirement account.

There is no concern that I'm going to take the cash and blow it on a bunch of frivolous things. I have everything that I need and that's just not my style. Yes, something obviously put me in a position where I had to file BK, but most of that was out of my control and the reason for my divorce.

So, here's what I'm thinking/wondering: would it be wise for me to take half (or even all) of the money coming from my ex's 401k to put in an emergency fund for myself, and then maybe max out my contribution into my own 401k?

Opinions?

[NoMoreCards]

During my 341 meeting today (also Ch. 7), the Trustee announced that just because you get discharged, you can't think your BK case is over. He said if you come into money within 6 months (life insurance, lottery, or the like) that it was our DUTY to report it to the Trustee's office. I am not sure what the legal ramifications would be for you to have such a large chunk of funds in your account so soon after discharge. If you worked with a attorney, please discuss this with him/her.

It would be a nightmare for you to decide to take that 401K money, and then to get nailed by the Trustee for not reporting it. OR to have to hand it over if they found out. Just cover your bases and discuss this with a lawyer first.

[LuciluS]

I would make sure and talk this over with your Attorney and pray you will be allowed to take the money. I was divorced and being single, can be scary.

I would take part of the money & put it in a CD or Treasury Bond. Something where the penalty is not large. Then I would open up a Savings Account and put some of it in there. You are right about if you lose your job,, you would have no monies to cover basics like food, etc.

So my Answer is Yes if your Attorney says its okay.

[kornellred]

Just put the 401K money you are getting from your ex back into your own plan. If you need money in the future, you can borrow from the plan and pay yourself back, or get a hardship disbursement if necessary. You don't need an emergency fund.

[cupcake]

During my 341 meeting today (also Ch. 7), the Trustee announced that just because you get discharged, you can't think your BK case is over. He said if you come into money within 6 months (life insurance, lottery, or the like) that it was our DUTY to report it to the Trustee's office. I am not sure what the legal ramifications would be for you to have such a large chunk of funds in your account so soon after discharge. If you worked with a attorney, please discuss this with him/her.

It would be a nightmare for you to decide to take that 401K money, and then to get nailed by the Trustee for not reporting it. OR to have to hand it over if they found out. Just cover your bases and discuss this with a lawyer first.

I'll call my attorney tomorrow. I thought that I would be fine seeing the money isn't from an inheritance or life insurance policy. Plus, the trustee was fully aware that I would be receiving this distribution from my ex's 401(k) and he was also made aware of the amount, as he had my divorce judgment at my 341.

Interesting... I never really considered that the trustee could possibly come after it. To me, it seemed like it would just be considered additional income and nothing more.

[cupcake]

Just put the 401K money you are getting from your ex back into your own plan. If you need money in the future, you can borrow from the plan and pay yourself back, or get a hardship disbursement if necessary. You don't need an emergency fund.

I need an emergency fund. I'm single, I live in an apartment, I don't have family to rely on in the case of a job loss or other hardship and I have no credit to fall back on (not that I want or need that anyway). It's ALL me and I need an emergency fund/cushion. And, if I lose my job, I would be unable to borrow from my 401k, leaving me to take an early withdrawal with the penalty.

[cupcake]

I attempted to contact my attorneys today but they are both out of the office. So, in the meantime, I thought I'd see if I could figure anything out myself. Here's what I've found:

I read my Nolo book and in Chapter 8, "Life After Bankruptcy" it says that I must notify the trustee if, within 180 days of filing, I receive or become entitled to receive property that belongs in my bankruptcy estate; and if I failed to list nonexempt property in my bankruptcy papers, such as an inheritance, property from a divorce settlement; or proceeds from a life insurance or death benefit plan.

As I mentioned, the trustee was provided with a copy of my divorce judgment at the time of filing and we went over it briefly during my 341. He also had my and my ex's 401k statements. So, at that time, he was aware that I would be receiving at least half of my ex's 401k account and he also knew how much I would receive. Obviously, he couldn't touch it, though, because the 401k accounts were exempt.

So, seeing he was made aware of the existence of the 401k accounts and knew that I would be receiving a transfer of funds from my ex per our divorce judgment; and, since it's been more than 180 days since my BK filing, it seems to me that there is no requirement that I notify the trustee of the 401(k) withdrawal. I should also note that the money would be deposited into a retirement account before I would be able to withdraw any portion of it.

I'm still going to contact my attorneys on Monday, but I'm just not seeing how this could be an issue for me. Even if the trustee tried to argue that a once exempt asset is now a non-exempt asset (if he can even do that), I am still past the 180-day deadline.

[justbroke]

So, here's what I'm thinking/wondering: would it be wise for me to take half (or even all) of the money coming from my ex's 401k to put in an emergency fund for myself, and then maybe max out my contribution into my own 401k?

If your 401(k) allows loans, and you have no loans taken out... then the 401(k) account is the PERFECT "emergency" account. You could take a loan against it (not considered a distribution), or in a dire emergency (and I won't define that) take a taxable distribution. I'm not advocating the dire emergency, but it is there.

When people have large sums of money available to them (readily), it's sometimes easy to "pinch" off it, until it's gone. I don't think you're be maxing out your contributions because it's part of a (qualified) domestic support order, but you'd have to consult a tax expert on that.

[justbroke]

During my 341 meeting today (also Ch. 7), the Trustee announced that just because you get discharged, you can't think your BK case is over. He said if you come into money within 6 months (life insurance, lottery, or the like) that it was our DUTY to report it to the Trustee's office.

The part I underlined, is not accurate. I'm not sure if you are recalling what the Trustee said incorrectly, or the Trustee actually stated that.

The only thing that you must report in the 180 days after filing (not after your 341 Meeting), is an inheritance, life insurance policy proceeds as a beneficiary, or property from a divorce. No where in the Bankruptcy Code (11 USC 541) does it say "lottery" or from anywhere. The money has to come from those 3 specific things.

You could technically win the lottery the day after filing, and it is NOT property of the Bankruptcy Estate in a Chapter 7.

[cupcake]

The part I underlined, is not accurate. I'm not sure if you are recalling what the Trustee said incorrectly, or the Trustee actually stated that.

The only thing that you must report in the 180 days after filing (not after your 341 Meeting), is an inheritance, life insurance policy proceeds as a beneficiary, or property from a divorce. No where in the Bankruptcy Code (11 USC 541) does it say "lottery" or from anywhere. The money has to come from those 3 specific things.

You could technically win the lottery the day after filing, and it is NOT property of the Bankruptcy Estate in a Chapter 7.

Hypothetically speaking then, if I were to cash out any portion of my ex's 401k that was awarded to me per our divorce judgment dated December 23, 2008 and transferred per a QDRO dated September 15, 2009, would that fall into the category of being "property from a divorce?" I'm well over 180 days post filing.

BTW, thanks for stopping in to answer my questions. I really appreciate it!!

[cupcake]

If your 401(k) allows loans, and you have no loans taken out... then the 401(k) account is the PERFECT "emergency" account. You could take a loan against it (not considered a distribution), or in a dire emergency (and I won't define that) take a taxable distribution. I'm not advocating the dire emergency, but it is there.

When people have large sums of money available to them (readily), it's sometimes easy to "pinch" off it, until it's gone. I don't think you're be maxing out your contributions because it's part of a (qualified) domestic support order, but you'd have to consult a tax expert on that.

My 401k account is sponsored though my employer allows for loans; I have never taken a loan on it. The funds that I am receiving from my ex will be transferred into a separate 401k account in my name with HIS investment company and I would never be able to take any loans on that account.

I definitely understand the "pinch off" theory when it comes to money. I don't see that happening to me because I really have nothing to spend it on. I'm single and I have everything I could possibly need. Anything is possible, but I just don't see myself pissing that money away especially since going thru a BK and learning a lot over the last year or so. Plus, I would put most of it into a money market account that would require me to have to actually make a phone call to request a check to take money out.

[NoMoreCards]

The part I underlined, is not accurate. I'm not sure if you are recalling what the Trustee said incorrectly, or the Trustee actually stated that.

The only thing that you must report in the 180 days after filing (not after your 341 Meeting), is an inheritance, life insurance policy proceeds as a beneficiary, or property from a divorce. No where in the Bankruptcy Code (11 USC 541) does it say "lottery" or from anywhere. The money has to come from those 3 specific things.

You could technically win the lottery the day after filing, and it is NOT property of the Bankruptcy Estate in a Chapter 7.

The trustee may not have used the exact word of "lottery", but he made it very clear that any large funds we come into, we were supposed to report it for up to 6 months after discharge. But he did say 6 months after discharge. I can't help but wonder if my Trustee was a bit confused anyhow because made a comment to one debtor that they could not file a 13, within 8 years of a 7 (and we all know that is incorrect).

Thanks for the info Justbroke. I am sure what you say is accurate, as you seem more knowledgeable than my Trustee was. In any case, I wanted the OP to cover her bases and discuss it with the attorney just to make sure it didn't bite her in the hind IF she took the cash. So wouldn't her 401k, be considered property from a divorce?

[cupcake]

In any case, I wanted the OP to cover her bases and discuss it with the attorney just to make sure it didn't bite her in the hind IF she took the cash. So wouldn't her 401k, be considered property from a divorce?

That's exactly what I want to know; I'm guessing that it is. But, seeing I'm more than 180 days post filing I'm not sure that it matters. But... when did I actually "receive" this property? Should the date of receipt be considered the date of the divorce judgment, the date of the QDRO or the date the money is transferred into my account? If it's the date of the divorce judgment then I received it prior to filing BK. Or, maybe none of it even matters?

[justbroke]

Hypothetically speaking then, if I were to cash out any portion of my ex's 401k that was awarded to me per our divorce judgment dated December 23, 2008 and transferred per a QDRO dated September 15, 2009, would that fall into the category of being "property from a divorce?" I'm well over 180 days post filing.

You said it yourself... you're well over 180 days post filing. It is not property of the estate!

(See my next note. The code is pretty specific on when you were entitled to it versus when you acquired it. The statement I wrote here is very generic. It does not take into account when the person was entitled to the property.)

[cupcake]

You said it yourself... you're well over 180 days post filing. It is not property of the estate!

Gotcha. Thanks, justbroke. You rock!!