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wishful8 · Aug 20, 2007, 08:37 PM

My husband just lost his job. We are dependent on his income, I work, but only make about 1/3 what he makes. He is 56 and I am 52. We are looking at a distribution from his 401k to pay off credit cards, but that is all we can pay off. We also have a mortgage which we cannot afford on only my income, a motor home and a car that have balances. If we pay the credit cards, we only have the 3 bills to manage or liquidate. We figure the house would be the easiest to sell, the car we would lose too much and the motor home would be hard to sell quickly enough. We are struggling with putting the money aside to pay the home car and motor home (only for a while until it runs out) and call the other creditors which total 9 or pay the 9 and deal with the 3 major ones.

The real question, is it logical to use the 401k lump distribution in this case? We think there is no 10% penalty because he is 56, is that true? Plus, because of bad financial decisions along with bad luck, our credit cards are at 28% so we would love to get rid of them all. Is it possible to recover from this mess? The total distribution plus the wages he has earned up to this point will just about equal his one year salary.

ebaines · Aug 21, 2007, 12:37 PM

First, what you are talking about is a distribution from your husband's 401(k) plan, not a loan -so the title of your post isn't quite accurate.

Yes, there is a 10% penalty on distributions made prior to your husband reaching 59-1/2 years of age. So you will pay ordinary income taxes on the distribution plus an additional 10% penalty. Depending on the state you live in, the sum of the federal income tax + state income tax + 10% may mean that as much as 45-50% goes away. That's why it is generally recommended to not take a distribution if you can avoid it. Plus, this will leave his retirement account seriously depleted, and you will have less available to live on when he truly retires.

Can your husband get a job soon so that you have more cash coming in? He may not be able to find the dream job right away, but any income is better than none. I agree about selling the house - it's a lousy market right now, but if you can't afford the carrying costs you have little choice. Do you have any equity in the house? If you do, then selling it quickly may allow you to pay off the credit cards and not take the distribution from the 401(k). Good luck!

ScottGem · Aug 21, 2007, 12:45 PM

I also agree not to take the distribution, roll it over into an IRA, you will need it later on. Plus the amount you will lose is not worth the gains.

Contact your creditors, explain the situation and see if they can work out some arrangements with you. If you can't sell the house, see about renting it. Maybe you can rent it and live in the motorhome, then if he can get another job, you might be able to move back when the lease expires.

wishful8 · Aug 21, 2007, 05:52 PM

Originally Posted by ebaines

First, what you are talking about is a distribution from your husband's 401(k) plan, not a loan -so the title of your post isn't quite accurate.

Yes, there is a 10% penalty on distributions made prior to your husband reaching 59-1/2 years of age. So you will pay ordinary income taxes on the distribution plus an additional 10% penalty. Depending on the state you live in, the sum of the federal income tax + state income tax + 10% may mean that as much as 45-50% goes away. That's why it is generally recommended to not take a distribution if you can avoid it. Plus, this will leave his retirement account seriously depleted, and you will have less available to live on when he truly retires.

Can your husband get a job soon so that you have more cash coming in? He may not be able to find the dream job right away, but any income is better than none. I agree about selling the house - it's a lousy market right now, but if you can't afford the carrying costs you have little choice. Do you have any equity in the house? If you do, then selling it quickly may allow you to pay off the credit cards and not take the distribution from the 401(k). Good luck!

Thank you , I guess I was wishful. I read that if you are between 55 and 59 1/2 when you are terminated and take a distribution, the 10% penalty would be waived. Is that not true?
I am afraid the creditors will want their money right away, we fell behind in payments due to a death of a parent who had no insurance, and only a few would work with us then.

ScottGem · Aug 21, 2007, 06:50 PM

Check with the plan admins. It may be the penalty would be waived, but the tax implication won't.

wishful8 · Aug 21, 2007, 07:08 PM

Originally Posted by ScottGem

Check with the plan admins. It may be the penalty would be waived, but the tax implication won't.

Thank you for the advise, I will read all the fine print and hope my husband gets some kind of employment before it is too late. I wonder if bankruptcy is a better option, I would not think so, but what do I know. It is obvious I am in the panic stage.
Thanks again.

Fr_Chuck · Aug 21, 2007, 07:20 PM

If you are getting to the point of foreclosure, having car or motor home repo'ed, it may be an option. But you have to look at your own situation.

I have had some of the same issues myself, I will do the what if,
If you take the 401 K money and pay off the credit cards, you still owe the house, the car and the camper, and have all the household bills.

It is time to do a serious budget, does cable TV need to go, perhaps the home phone or that extra cell phone. If you can't pay all the bills even if you pay off the credit cards, you are only slowing down the number of colelction cars, not stoping the problem.