401K Hardship withdrawal

[kcoll710]

I am an Oregon resident who a couple years back was laid off of my job. I was able to get another within a couple months but unfortunately at lower pay. This all happened months after we purchased a home. We use to have excellent credit. But with gas utilities groceries etc all going up, our credit cards got used and now the interest rates are all over 30%. Because of all that, our insurance has sky rocketed. My youngest is now in college, another loan payment and my oldest just lost her job - her husband is in school, so they have moved back home with their two kids. Enough said. My bills are more then what we take home. Seems like it all hit in the last year. Unfortunately our home value has dropped over $100k this last year and we do not have equity enough to refinance to get money out to pay off our credit cards. We owe approximately $100k in excess bills, credit cards, credit lines, student loans. Our bills are approximately $2k a month more then we take home. We have over $200k in my husbands 401k (we have lost a considerable amount in there as well- 30% this year alone). I owe the IRS money and when I spoke to them about a payment plan, I asked him if we were eligible for a 401k hardship withdrawal. He laughed and said yes. I asked numerous times- every time he said yes. I spoke with my husbands administrator. They said they mimic the IRS laws. They said the IRS will not allow a hardship withdrawal to pay off credit cards. I can't pay my bills. I have lost all my equity in my home. I have lost a considerable amount in his 401k. I would prefer to keep my home as opposed to the 401k - I believe that will get a better return then his plan- Write off on my taxes for the home loan and the equity will come back. The 401k hasn't had near the return my homes have had. We are too old for bankruptcy. He would like to retire in 7 or so years. I am much younger and will continue to work. What are the 401k hardship withdrawal laws? Are we forced into bankruptcy even though we would prefer to take a portion of his 401k to pay off our debts?

Thank you

 

[tranquility]

The rules on hardship withdrawals are in the plan's documents. Apparently, by thoses rules the company will allow you to withdraw the money.

The IRS, on the otherhand, wants people to save money they put tax-free into retirement. Early withdrawals will be taxed and a 10% excise tax penalty will be added to the withdrawal.

You decide if an exception applies:

(1) IMPOSITION OF ADDITIONAL TAX

If any taxpayer receives any amount from a qualified retirement plan
(as defined in section 4974(c)), the taxpayer's tax under this
chapter for the taxable year in which such amount is received shall
be increased by an amount equal to 10 percent of the portion of such
amount which is includible in gross income.

(2) SUBSECTION NOT TO APPLY TO CERTAIN DISTRIBUTIONS

Except as provided in paragraphs (3) and (4), paragraph (1) shall not
apply to any of the following distributions:

(A) IN GENERAL
Distributions which are--

(i) made on or after the date on which the employee attains
age 59 1/2,

(ii) made to a beneficiary (or to the estate of the
employee) on or after the death of the employee,

(iii) attributable to the employee's being disabled within
the meaning of subsection (m)(7),

(iv) part of a series of substantially equal periodic
payments (not less frequently than annually) made for the
life (or life expectancy) of the employee or the joint
lives (or joint life expectancies) of such employee and his
designated beneficiary,

(v) made to an employee after separation from service after
attainment of age 55,

(vi) dividends paid with respect to stock of a corporation
which are described in section 404(k), or

(vii) made on account of a levy under section 6331 on the
qualified retirement plan.

(B) MEDICAL EXPENSES

Distributions made to the employee (other than distributions
described in subparagraph (A), (C), or (D)) to the extent such
distributions do not exceed the amount allowable as a deduction
under section 213 to the employee for amounts paid during the
taxable year for medical care (determined without regard to
whether the employee itemizes deductions for such taxable year).

(C) PAYMENTS TO ALTERNATE PAYEES PURSUANT TO QUALIFIED DOMESTIC
RELATIONS ORDERS

Any distribution to an alternate payee pursuant to a qualified
domestic relations order (within the meaning of section
414(p)(1)).

(D) DISTRIBUTIONS TO UNEMPLOYED INDIVIDUALS FOR HEALTH INSURANCE
PREMIUMS

(i) IN GENERAL

Distributions from an individual retirement plan to an
individual after separation from employment--

(I) if such individual has received unemployment
compensation for 12 consecutive weeks under any
Federal or State unemployment compensation law by
reason of such separation,

(II) if such distributions are made during any taxable
year during which such unemployment compensation is
paid or the succeeding taxable year, and

(III) to the extent such distributions do not exceed
the amount paid during the taxable year for insurance
described in section 213(d)(1)(D) with respect to the
individual and the individual's spouse and dependents
(as defined in section 152, determined without regard
to subsections (b)(1), (b)(2), and (d)(1)(B) thereof).

(ii) DISTRIBUTIONS AFTER REEMPLOYMENT

Clause (i) shall not apply to any distribution made after
the individual has been employed for at least 60 days after
the separation from employment to which clause (i) applies.

(iii) SELF-EMPLOYED INDIVIDUALS

To the extent provided in regulations, a self-employed
individual shall be treated as meeting the requirements of
clause (i)(I) if, under Federal or State law, the
individual would have received unemployment compensation
but for the fact the individual was self-employed.

(E) DISTRIBUTIONS FROM INDIVIDUAL RETIREMENT PLANS FOR HIGHER
EDUCATION EXPENSES

Distributions to an individual from an individual retirement
plan to the extent such distributions do not exceed the
qualified higher education expenses (as defined in paragraph
(7)) of the taxpayer for the taxable year. Distributions shall
not be taken into account under the preceding sentence if such
distributions are described in subparagraph (A), (C), or (D) or
to the extent paragraph (1) does not apply to such distributions
by reason of subparagraph (B).

(F) DISTRIBUTIONS FROM CERTAIN PLANS FOR FIRST HOME PURCHASES

Distributions to an individual from an individual retirement
plan which are qualified first-time homebuyer distributions (as
defined in paragraph (8)). Distributions shall not be taken into
account under the preceding sentence if such distributions are
described in subparagraph (A), (C), (D), or (E) or to the extent
paragraph (1) does not apply to such distributions by reason of
subparagraph (B).

(G) DISTRIBUTIONS FROM RETIREMENT PLANS TO INDIVIDUALS CALLED TO
ACTIVE DUTY

(i) IN GENERAL

Any qualified reservist distribution.

(ii) AMOUNT DISTRIBUTED MAY BE REPAID

Any individual who receives a qualified reservist
distribution may, at any time during the 2-year period
beginning on the day after the end of the active duty
period, make one or more contributions to an individual
retirement plan of such individual in an aggregate amount
not to exceed the amount of such distribution. The dollar
limitations otherwise applicable to contributions to
individual retirement plans shall not apply to any
contribution made pursuant to the preceding sentence. No
deduction shall be allowed for any contribution pursuant to
this clause.

(iii) QUALIFIED RESERVIST DISTRIBUTION

For purposes of this subparagraph, the term "qualified
reservist distribution" means any distribution to an
individual if --

(I) such distribution is from an individual retirement
plan, or from amounts attributable to employer
contributions made pursuant to elective deferrals
described in subparagraph (A) or (C) of section
402(g)(3) or section 501(c)(18)(D)(iii),

(II) such individual was (by reason of being a member
of a reserve component (as defined in section 101 of
title 37, United States Code)) ordered or called to
active duty for a period in excess of 179 days or for
an indefinite period, and

(III) such distribution is made during the period
beginning on the date of such order or call and ending
at the close of the active duty period.

(iv) APPLICATION OF SUBPARAGRAPH

This subparagraph applies to individuals ordered or called
to active duty after September 11, 2001. In no event shall
the 2-year period referred to in clause (ii) end before the
date which is 2 years after the date of the enactment of
this subparagraph.

 

[LdiJ]

I am an Oregon resident who a couple years back was laid off of my job. I was able to get another within a couple months but unfortunately at lower pay. This all happened months after we purchased a home. We use to have excellent credit. But with gas utilities groceries etc all going up, our credit cards got used and now the interest rates are all over 30%. Because of all that, our insurance has sky rocketed. My youngest is now in college, another loan payment and my oldest just lost her job - her husband is in school, so they have moved back home with their two kids. Enough said. My bills are more then what we take home. Seems like it all hit in the last year. Unfortunately our home value has dropped over $100k this last year and we do not have equity enough to refinance to get money out to pay off our credit cards. We owe approximately $100k in excess bills, credit cards, credit lines, student loans. Our bills are approximately $2k a month more then we take home. We have over $200k in my husbands 401k (we have lost a considerable amount in there as well- 30% this year alone). I owe the IRS money and when I spoke to them about a payment plan, I asked him if we were eligible for a 401k hardship withdrawal. He laughed and said yes. I asked numerous times- every time he said yes. I spoke with my husbands administrator. They said they mimic the IRS laws. They said the IRS will not allow a hardship withdrawal to pay off credit cards. I can't pay my bills. I have lost all my equity in my home. I have lost a considerable amount in his 401k. I would prefer to keep my home as opposed to the 401k - I believe that will get a better return then his plan- Write off on my taxes for the home loan and the equity will come back. The 401k hasn't had near the return my homes have had. We are too old for bankruptcy. He would like to retire in 7 or so years. I am much younger and will continue to work. What are the 401k hardship withdrawal laws? Are we forced into bankruptcy even though we would prefer to take a portion of his 401k to pay off our debts?

Thank you

One thing you might want to know, is that retirement funds are protected in a bankruptcy. They cannot be taken away from you. You can also reaffirm houses and cars as long as you don't have tons of equity in them, and it seems as though you do not.

You really should consider getting a consult with both a tax professional, and a bankruptcy attorney, with a thorough list of your assets and debts in front of you.