[kwhittle]

I am 56 years. I have a $48,000 401K with a $19,000 loan against it. In the last year my husband had to file for disability, was approved but has to wait 6months for his 1st check. Because of the loss of income, a variable rate house loan and way too much credit debt we made the tough discission to file for bankruptcy and let our home go back.

We live in Colorado and cannot afford to stay here. We would like to move and purchase a home - start over. The only way we can afford to do this is to cash out my 401K.

Are we going to end up paying 30-40% to taxes and penalty?

Any information - guidance would be greatly appreciated.

[maxis]

Yes you will but you can you borrow againist it rather than cash out

[ebaines]

I assume from your post that you are still employed, and that your 401(k) is from your place of work (not a previous job) - correct? If so, then by IRS rules you are allowed to take a withdrawal in order to avoid eviction or forelosure on your home. However, you will be subject to income tax as well as 10% early withdrawal penalty on the withdrawal, since you are under 59-1/2 and still working. Further, the $19K loan you currently have will most likely be converted from a loan to a withdrawal (check with your plan administartor to be sure about this), which is also subject to income tax and penalty. So what will happen is this:

1. You withdraw the $29K balance from your account. Company automatically withholds 20% of that for income taxes ($5.8K), and they send you a check for $23.2K.

2. Come April you will owe income taxes on the full $48K withdrawal. The $5.8K that they withheld may not be enough, as your income for the year has been boosted by $48K. You should plan on having to come up 20% of the $19K, or $3.8K. This is just a planning number - obviously it's impossible to predict the actual amount without a lot more information.

3. Come April you will also owe 10% penalty on the $48K, for another $4.8K.

4. You will also owe CO state income tax on the $48K. That's another 4.6%, or about $2.2K.

Bottom line - after cashing in your $48K 401(k) you will net about $12.4K. Ouch. You would indeed be better off if you can increase the amount you are borrowing from your plan, although most plans cap the maximum loan at 50% of the plan balance, which means only another $5K available to borrow.

Another option to be aware of - if you leave your employer before making the withdrawal (you did say you are planning to move), since you are over 55 you can avoid the 10% penalty. You would still owe the income taxes however.