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    Thrift Savings Plan (TSP) withdrawl BEFORE BK

    Not sure if this is the right area to post this so please move if not. My question is...If I make an early withdrawal from my TSP (essentially the same thing as a 401K) due to negative cash flow a few months before I file BK, how will that look?

    Right now we are not sure if we are going to file Ch13 or 7 but while we are trying to figure it out and let time pass since our last credit card transactions (as advised by an attorney) we have a negative cash flow each month. I am still trying to make monthly payments because we used some of the cards a few months ago. I want to make at least 6-8 months payments to avoid any problems when we do file. In the past, I would pay the cards and re-use them when the cash for the month ran out (I think that is considered Robbing Peter to Pay Paul). Anyway, we cant do that anymore. So I was looking at taking a withdrawal from my TSP account for about $4000. I realize that is a TERRIBLE financial decision but its kinda my only option right now. I cant take a TSP loan because I already have one that I am paying on. If I do this...how will it affect our BK (13 or 7) when we file? I am assuming the money will be gone or close to gone by the time we file but of course we need to be honest and disclose it, just not sure of the ramifications.

    Any assistance is appreciated and as always, THANK YOU

    #2
    I did a hardship withdrawal from the TSP a month before I filed BK (and during the 2013 shutdown). I did that with the intention of paying the attorney fee, but i'm sure some of that went to cover the time sitting home to cover essential expenses without a paycheck. Except for increasing my income for the six-month lookback it had no effect on my Ch 13. Trustee didn't grill me about it, no inquiries. You do know that it will have an effect on your taxes for next year because of the penalties, especially if you choose the option to not have the 10% penalty tax taken out of the withdrawal.
    Filed Ch 13 November 2013, discharged March 2019
    Credit Karma FICO scores 5 months post-discharge:
    717 Trans Union/728 Equifax

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      #3
      I am taking a loan against mine and attorney said that is fine. So if I have to pay it back will it still be considered income. It's like we are totally stuck.
      Chapter 7 Filed 10/17/07
      341 mtg. 11/15/07
      Discharged 2/19/08
      Closed on 2/26/08

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        #4
        Paying back a 401(k) from your earned income is not "additional" income (not additional DMI). It's the same money just re-directed.
        Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
        Status: (Auto) Discharged and Closed! 5/10
        Visit My BKForum Blog: justbroke's Blog


        I am not an attorney. Any advice provided is not legal advice.

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          #5
          SWITCH625....I do understand that tax implications of this and I did have them withdrawal the 10% upfront so hopefully it wont be too painful. Just one more question...when you say it will increase your income for the 6 month look back...where does that show up? Will I see the increase in income on my LES? Obviously it will be shown on my bank statements but I assumed I would need to self-report it to my attorney because it would not show on my paystub.

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            #6
            Just curious..if you are taking the money out as a loan, why would you be paying tax? If you borrow from your 401K plan, you don't pay tax as it's just a loan.
            Filed Chapter 13 - 07/20/12
            Discharged 8/2/16

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              #7
              This is sounding like a withdrawal and not a loan. I totally missed the part where switch625 wrote "hardship withdrawal" which is a taxable event.
              Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
              Status: (Auto) Discharged and Closed! 5/10
              Visit My BKForum Blog: justbroke's Blog


              I am not an attorney. Any advice provided is not legal advice.

              Comment


                #8
                I have been reading & mildly confused by parts of this. I do have a specific question that may help others, as well: Are we saying that a 401k *hardship withdrawal* would count in the 6-month income calculation?

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                  #9
                  A "hardship withdrawal" which is one-time (and not "regular" withdrawals due to retirement) should not be income. At least in Florida I haven't seen this issue. I suppose some crafty Trustee could complain and say that it was retirement income. The majority of districts treat it as non-income. I would just confer with an attorney in your specific District.
                  Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
                  Status: (Auto) Discharged and Closed! 5/10
                  Visit My BKForum Blog: justbroke's Blog


                  I am not an attorney. Any advice provided is not legal advice.

                  Comment


                    #10
                    Thanks, jb. Still considering that route to pay for tuition & hadn't even thought about whether that would be treated as income in the calculation.

                    Comment


                      #11

                      The OP asked about a TSP "withdrawal", not a "loan".

                      In the TSP (Federal Government employee/military version of a 401K), besides the TSP loan that you can take, which is presumably like any other 401K loan, You can also take a "hardship withdrawal" of funds you contribute, that you do not pay back. You can only take one withdrawal every six months and if you withdraw before you are 59 1/2, I believe, that withdrawal is taxed 10% then a 20% penalty on top of that, like an early IRA withdrawal.The "hardship" that qualifies is generally medical expenses,casualty loss, divorce legal fees or when household expenses exceed income. See the link for TSPs info sheet on loans, withdrawals and bankruptcy.
                      https://www.tsp.gov/PDF/formspubs/oc95-10-b.pdf

                      As for the increase in income for the six-month lookback, I do have to check on this with my petition, but I'm thinking that I would have included the hardship it in my six-month lookback because TSP hardship withdrawals are reported to the IRS as income and you get the 1099 (or similar). My return was sent to my attorney and trustee and the withdrawal was included as income, so I didn't want any trouble at the 341 by not including it in my six month look back. In any event, check with your attorney to see if it needs to be included or not.
                      Last edited by switch625; 05-25-2017, 11:49 PM.
                      Filed Ch 13 November 2013, discharged March 2019
                      Credit Karma FICO scores 5 months post-discharge:
                      717 Trans Union/728 Equifax

                      Comment


                        #12
                        Filed Ch 13 November 2013, discharged March 2019
                        Credit Karma FICO scores 5 months post-discharge:
                        717 Trans Union/728 Equifax

                        Comment


                          #13
                          SFJ75: My hardship withdrawal did not show up on the LES (Leave and Earnings Statement or "paystub") maybe because TSP sent withdrawal funds to my bank account separately, so it was not included in my pay. TSP sends a confirmation letter with the amount withdrawn and the date you can withdraw again. Then you get a 1099 in January of next year.
                          Filed Ch 13 November 2013, discharged March 2019
                          Credit Karma FICO scores 5 months post-discharge:
                          717 Trans Union/728 Equifax

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                            #14
                            Originally posted by switch625 View Post
                            SFJ75: My hardship withdrawal did not show up on the LES (Leave and Earnings Statement or "paystub") maybe because TSP sent withdrawal funds to my bank account separately, so it was not included in my pay. TSP sends a confirmation letter with the amount withdrawn and the date you can withdraw again. Then you get a 1099 in January of next year.
                            There is no 1099 generated if you pay it back. It's only when you default on paying it back that it becomes a distribution.

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                              #15
                              A hardship withdrawal is treated like a distribution because it is not a loan (and you can take out loans on the TSP), it's not something you pay back.. I received 1099s for the hardship withdrawals and had the choice of having tax withdrawn from them or not. Hardships withdrawal are granted for limited specific reasons. https://www.tsp.gov/PlanParticipatio...ml#eligibility
                              Filed Ch 13 November 2013, discharged March 2019
                              Credit Karma FICO scores 5 months post-discharge:
                              717 Trans Union/728 Equifax

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