Another Question About 401k Withdrawal

[Dealer36]

I was discussing in another post that I was thinking about withdrawing my 401k since I lost my job. It's only about 13,000 and after taxes I will be lucky to get 10,000. I am educated on that part of the 401k but what I am having a difficult time understanding is this: I talked to my lawyer the other day and they informed me that if I withdraw the 401k that the creditors can go after it (if they know about it)..I got a sense of what they were trying to tell me.
My main question is this: Is it that the 401k becomes considered income when it is distributed? I made 52,000 all of last year and I made 53,000 this year so far up until I lost my job last week. Would it make a difference if I wait until the 1st of January to withdraw my 401k for income purposes? I don't think if I stay out of the casino business I will make that much next year?? I don't know..just speculating..If my 401k is considered income combined with what I "might" make next year I don't think it will be over 52,000 as that is what my original plan had me making per year..I hope this post isn't too confusing..all help would be greatly appreciated.

[Flamingo]

When you have funds withheld from your paycheck to go into a 401(k), those funds are withheld pretax so if you decide to take out those funds, you will be hit with state and federal tax plus a 10% penalty by the IRS in the year in which withdrawn. So your $13,000 will become maybe about $8,500. That right there should indicate to you the loss you will sustain on funds that are exempt during a bankruptcy.

So that gives you $8,500 of extra funds that is included in your income for that tax year.

[PoorGrammyinBK7]

If its in the bank as cash - it is an asset I would think, and depends on your state law, but could be fair game for the trustee to take.

I would not touch that 401K if I were you.

Is there another way?

[Dealer36]

Actually the whole 13,000 would be counted as income just as the gross amount of what a person makes is counted as income. I do understand 401k withdrawals but I don't understand it in relation to a bankruptcy. Will it be considered an asset or income? If it's considered as income then I think I would be better off taking it next year since I have already made what I made last year. I mean if the trustee looks at is as income versus an asset should it not be protected as it would be considered my only means of income? I mean I wouldn't be joyriding with it but simply paying my bills until I get another job. I know it's not good to mess with 401k considering that we could all use it for retirement but NOW is equally important to me so that I don't lose my house while I am looking for another job. Thanks to all of your responses.

[Flamingo]

Actually the whole 13,000 would be counted as income just as the gross amount of what a person makes is counted as income. I do understand 401k withdrawals but I don't understand it in relation to a bankruptcy. Will it be considered an asset or income? If it's considered as income then I think I would be better off taking it next year since I have already made what I made last year. I mean if the trustee looks at is as income versus an asset should it not be protected as it would be considered my only means of income? I mean I wouldn't be joyriding with it but simply paying my bills until I get another job. I know it's not good to mess with 401k considering that we could all use it for retirement but NOW is equally important to me so that I don't lose my house while I am looking for another job. Thanks to all of your responses.

Yes, the entire $13,000 would be counted as gross income but the taxes and penalty would be subtracted off because that is all you would basically get and only $8,500 available out of the entire amount that the creditors could get. That is what I meant. The check you would receive from the distribiution will have the taxes taken out of it and you will be responsible for the penalty on your tax return when you file. Some people withhold the penalty out of the distribution so they will have the funds to pay it at tax time if they do not expect a refund. Same as regular income; the taxes, SS, and other required withholdings reduce the amount you actually have. All that would be factored into information utilized for filing BK. A 401(k) plan is exempt in a BK. If you take the money out, it is income and is reported on your tax returns as such in the appropriate section/boxes. It is the last thing you want to touch but if you are in dire straits it is your money to do with as you please.