401K loan default and Bankruptcy

[mmcconn2]

I filed BK cp7 in November 2004, it was discharged in March 2005 at the tme of filing I had loans against my 401K around $18000.00, even after BK I could not make the payments on the Loans so I claimed a hardship and defaulted on the loans. I realize I am responcible for the tax liability on the $18000.00 but because I filed BK is there anything that protects me from the early with drawl penelties? Or does anybody know who I should direct this question too? A accountant? Tax attorney etc....? Any help would be appreciated.

[Minnymouth]

This is not a question that most of us would be able to answer for you. Early withdrawl penaties usually would stay the same.....

If you have an attorney, you might ask him about this, otherwise talk to a tax advisor and let him know you are in bankruptcy.

[SinkingFast]

You should getting a 1099 in the mail some time soon from the investment company that handles the 401K. It will show how much you have left in the plan, if any, how much was charged to you as income in loan default, etc.

I'm no tax expert, but I think you are going to have to pay the 10% penalty for early withdrawal on the amount of the discharge/default. In your case that's $1800. You will also be responsible for taxes on the additional $18K because it became regular earnings in the eyes of the gov't/IRS.

If you structure your withholdings each paycheck so you get back a big refund each year you may not owe much if anything. If you typically get back a smaller refund or sometimes pay when you file your income taxes, you may owe taxes.

[StaciMM]

Did they take out the penalty & estimated taxes and send you the difference? If so-you've already paid it.

[bkfiler]

I realize I am responcible for the tax liability on the $18000.00 but because I filed BK is there anything that protects me from the early with drawl penelties?

does anybody know who I should direct this question too? A accountant? Tax attorney etc....? Any help would be appreciated.

see a tax attorney for this. also, if he does bk then even better.

i dont get what you are asking? because you filed bk, which is over with, are you allowed to not pay the money back? or taxes back? or reopen the case and have that included?

[SinkingFast]

Did they take out the penalty & estimated taxes and send you the difference? If so-you've already paid it.

It was a 401K loan, Staci. Nothing is withheld from those. They give you your money outa your acct and you pay yourself back over a specified period of time at a specified interest rate. If you loose your job, change jobs, whatever, you are still required to make the payments. If you don't make your payments, the unpaid amount becomes taxable income at the time of default on the loan.

[SinkingFast]

There's a specific set of guidelines that allow you to take money out of 401K's without penalty. There are 5 of them, I think, but I can't remember them all. Most involve some sort of hardship, one is age related. Buying a primary residence is one. Medical Hardship, medical bills for you or your dependent. You are 59.9 years old?? I think. And there's a couple others. Other than that, you pay the 10%.

[SinkingFast]

From Money-Talk.org

http://www.money-talk.org/401k/401k-...hdrawals.shtml

The money that you contribute to your 401k is yours, and you can make a full or partial withdrawal of your vested funds at anytime that your plan allows. However, no matter what your age, any funds taken out will be subject to income tax and you will be ultimately taxed according to your income bracket and current tax rates. Remember that large withdrawals may put you into a more expensive tax bracket, and that a mandatory 20% tax withholding is taken out up-front so the cash you wind-up with will be less than the original withdrawal amount.

On top of the taxes, you may also face an early withdrawal penalty if younger than the retirement age (59.5). Currently running at 10%, the penalty can only be avoided in certain hardship cases as provided by law. These include heavy medical expense burden, disability, certain cases involving higher-education expenses, buying or building a first home and some other cases.

As an alternative to 401k early withdrawals, consider 401k rollovers or 401k loans, which allow you to borrow from yourself with all the interest being payed to you into your 401k account.


Borrowing money from yourself can be easy, but is not without risk.

Many 401k plans offer participants the option of taking a loan from their vested account balance. Some plans will allow loans for any purpose, while others may restrict use to paying medical or education expenses, to prevent home foreclosure, or to finance a first home, additionally spousal consent and automatic payment via payroll deduction are sometimes required. Loans are available for up to 50% of your vested balance or $50,000, which ever is less and must be repaid with interest within 5 years, excepting borrowing for a first home where additional time may be allowed.

On the downside, your debt must be quickly repaid upon leaving your job to prevent defaulting. Defaulting on a 401k loan will incur the same penalties as a 401k early withdrawal: income tax and a 10% penalty.

[bkfiler]

no they can take the 10% out and some do depending on the company regardless of what you want. most times you do have a choice though. you are asked if thats what you want as well many time. plenty of ways around it. but you will pay in the end.

IRS is worse then a girl in love with you that you cheated on with her best friend. you are screwed until the day you die (or pay the IRS)

[SinkingFast]

You don't pay a 10% penalty when you take out a 401K loan. I know. We've had one before. The investment company told us we could borrow up to 40% or so of the Vested amount we had in the acct at the time. They always leave room for Market fluctuations incase your investments tank. They told us how much the payments would be, for how long, at what rate of interest, and took the payments by payroll deduction.

Since it's a LOAN it's not tax liable as long as you are paying it back. Hence no 10% penalty for early withdrawal. If you default on the 401K LOAN, then it's tax liable and subject to the penalty.

[StaciMM]

Got it! I was thining of a regular distribution...

[bkfiler]

whoops, didnt realize it was a loan. well the info still sticks if it was a distribution. hehe

[bkfiler]

I'm no tax expert, but I think you are going to have to pay the 10% penalty for early withdrawal on the amount of the discharge/default. In your case that's $1800. You will also be responsible for taxes on the additional $18K because it became regular earnings in the eyes of the gov't/IRS.

guess we all did.

[SinkingFast]

Hey! You guys are teaching me a whole lot of things I did not know.

It's nice once in a while for me to see a post where I do know something.

[bkfiler]

umm well ok but we read your post and thought it was a distribution.

you did too from the looks of it. had we known it was a loan then it would have been different response.

we are blaming it on you lol