This last year my fiancé (who was divorced a few years ago) was in the process of clearing up some financial difficulty she acquired and the bills she came by after leaving her prior relationship. She supported herself and her son for a period during the divorce proceedings. After the legal issues were put to rest, she used the settlement money to put down on a house which paid 50% of its value up front (excellent investment).

To get out from under some heavy credit card debt (incurred from her initial departure from the relationship and trying to stay afloat), she paid off the cards using a home equity loan, cutting the interest from 19-20% down to 4-5% (another good move).

Here's where the trouble started. There was another fund that her Ex had that she was waiting to receive ( I believe it was from a Roth IRA - $17k). It was supposed to come in within 3-6 weeks. What she wanted to do is pay off the home equity loan. She was advised by her investment firm that she could 'take a loan from her current for $17, and as long as she returned the $17k within a certain time frame using the $17k from the Roth fund that was coming in to roll over into her 401k, that there would be no penalty or tax issues.

She was in tears today after returning from getting her taxes done, as she was informed that she has a $3800 tax bill she owes. Now she's freaking, and wants to totally liquidate her 401k... take the penal and tax hit again... and pay off all her bills... which will leave her debt free and '401k FREE'.

Now... I'm by FAR qualified from being anything close a tax or investment guru, but from my understanding, if money is taken from a Roth IRA, are the same penalities and taxes incurred as there would be if a withdrawl was made from a 401k? First off, I need to find out from her if the Roth was rolled over into her 401k or if she set up a Roth fund for herself.

Any advice? Thx for your time.

Quick revision:... the $17k came in from a regular IRA as roll over

Typo... was from 401K not IRA

Lol... update: got the full story... the $17k was from a 403b from her Ex, rolled over into her 401k to cover the money she took from her 401k. She was told by her investment broker that if she replaced the funds within a month that there wouldn't be any fees.

OK, so do I have this right:

1. She takes $17K out of her 401(k)
2. Within 30 days she rolls $17K from her ex's old 403(b) into her 401(k).
3. She was told that as long as the $17K "replacment" from the 403(b) was put into her 401(k) within 30 days, there would be no taxes or penalty.

Seems to me that thisis not right - that the rollover from the 403(b) would not be considred as her repaying the $17K withdrawal. Otherwise this would be a huge loop hole - repaying a distribution with rollover money would mean that somehow she gets $17K without ever having to pay taxes or penalty. Nice try, but this I think she owes the taxes (and penalty).