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    daver's Avatar
    daver Posts: 2, Reputation: 1
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    #1

    Dec 12, 2006, 09:20 PM
    401k hardship withdrawal
    I will try to summarize my situation. My wife & I gross $55000/yr. We've recently re-financed our house to the max value of $110000 & still have $50000 of credit card debt. We are both losing our jobs due to a plant closing. I have a job on the horizon but, my wife, who earns the majority of the wages, probably will not find a similar wage job in our locale. I'm considering withdrawing my 401k to cover the $50000 card debt since our future employment is up in the air. Could I qualify for a hardship withdrawal?
    AtlantaTaxExpert's Avatar
    AtlantaTaxExpert Posts: 21,836, Reputation: 846
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    #2

    Dec 13, 2006, 10:24 AM
    Negative, that is NOT considered a hardship withdrawal in the eyes of the IRS; if you withdraw, taxes will be due, to include th 15% Early Withdrawal Penalty.

    Carry the credit card debt for as long as possible. Set up a priority list of which bills to pay and which ones not to pay (the credit cards is a NOT TO PAY item) until you both get employed.

    You may need to consider bankruptcy. The house will be protected, as will the money in the 401K. Do NOT access that 401K until you need it to pay for your home, utilities and groceries!
    daver's Avatar
    daver Posts: 2, Reputation: 1
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    #3

    Dec 15, 2006, 05:44 PM
    What about defaulting on a 401k loan vs. total withdrawal?
    AtlantaTaxExpert's Avatar
    AtlantaTaxExpert Posts: 21,836, Reputation: 846
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    #4

    Dec 15, 2006, 06:00 PM
    If you default on a 401K loan, the loan amount will be treated and taxed as an early withdrawal, with all the adverse effects noted above.

    Sorry!
    AtlantaTaxExpert's Avatar
    AtlantaTaxExpert Posts: 21,836, Reputation: 846
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    #5

    Dec 16, 2006, 09:33 AM
    Bill:

    Yes, when there NO other sources of income and bankruptcy is NOT an appropriate option.

    The tax bill for early 401K or IRA withdrawals can be as high as 46%, depending on which state you live and your marginal tax rate when the withdrawal is made. You will pay AT LEAST the 10% Early Withdrawal Penalty, as that is a punitive tax which CANNOT be mitigated (meaning that even if you owe no other taxes, you STILL must pay 10% of the withdrawal amount).

    BOTTOM LINE: If at all possible, avoid withdrawing the 401K funds. If you must, transfer the funds to a rollover IRA, then make the withdrawals from the IRA so you can manage the amounts withdrawn.
    lnza4's Avatar
    lnza4 Posts: 22, Reputation: 2
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    #6

    Jun 19, 2008, 09:09 PM
    I don't understand taking a loan from my 401k due to fiancial hardship/disability. Or can I roll it over and take a monthly supplement to help with the mortgage. This way I avoid the 10 % penalty and I know it is still added on the 1099... How do I proceed with this option. I;m 55yrs and I just filled for SS due to a disability.I live in Florida and I'm presently collection Workmen's Comp. I have no idea how long wc last. Maybe you can help>
    AtlantaTaxExpert's Avatar
    AtlantaTaxExpert Posts: 21,836, Reputation: 846
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    #7

    Jun 20, 2008, 09:09 AM
    If you are on workmen's compensation and are about to draw Social Security disability, that means you have left the company that provided the 401K.

    Roll the 401K money into an IRA.

    Set up a strict budget to try to make the workman's comp last as long as possible. Access the IRA for funds as needed.

    The fact that you are disabled will exempt you from the 10% Early Withdrawal Penalty.

    BTW, WC will probably last as long as it takes for the SS disability to be approved.
    lnza4's Avatar
    lnza4 Posts: 22, Reputation: 2
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    #8

    Jun 20, 2008, 08:47 PM
    BTW... I don't understand what that is. If Im no longer putting into the fund after one year than I think you can rollover the monies. Correct me if I'm wrong... Your saying rollover the money and have a monthly allowance this would be just a added 1099 not a penalty. And I first have to be awarded by social security. I only just applied, with can take a while so I have been told...
    AtlantaTaxExpert's Avatar
    AtlantaTaxExpert Posts: 21,836, Reputation: 846
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    #9

    Jun 23, 2008, 07:58 AM
    BTW means By The Way.

    If you take the money out of he IRA, the penalty will STILL be incurred, but by taking it out gradually, you can budget the money and limit your exposure to the penalty.
    PPS140's Avatar
    PPS140 Posts: 1, Reputation: 1
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    #10

    Apr 7, 2012, 09:15 PM
    Hello! My husband went bankruptcy from his business but cashed out my 401k to pay off the business loan. Does my case qualify for hardship?
    AtlantaTaxExpert's Avatar
    AtlantaTaxExpert Posts: 21,836, Reputation: 846
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    #11

    Apr 8, 2012, 08:36 AM
    Does not matter whether it is hardship or notm the money is still taxed.

    Paying off bankruptcy debt DOES relieve you from paying the 10% Early Withdrawal Penalty IF the withdrawal is ordered by the bankruptcy court.
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