401k questions (HELP)?

401k questions (HELP)?
I would prefer that only those completely knowledgeable about 401k's answer this, and please, don't say we're stupid for thinking about doing what we need to do. OK, hubby has a 401k at work with xxxxx.xx dollars in it. We borrowed xxxx.xx from it last year and have been paying back since then. His employer is closing their doors next week (so this doesn't fall under his having been fired/quit). Since his place of employment is closing are we going to be penalized for no longer "paying back" what we borrowed? We live in a very small town and will need to relocate. Problem is a vehicle. Here you can walk everywhere, but as I said we need to relocate and he needs transportation to look for work (there is NO public transportation, so that idea is out). We want to take the money from his 401k to purchase a vehicle, and we realize we will be hit with penalties. What I need to know is how much, when (can it be deferred until next years taxes) and on which amount(s). The following amounts are not exactly what he has or what we borrowed, but close enough to give me an idea if what we want to do will work. Amount (technically) in account 16000.00 borrowed 4000.00 money showing account 12000.00 Thank you for any help you can give me (H and R Block has yet to return my phone call). Thank you everyone. I DID call the IRS and spoke to a wonderful woman who talked me through the whole thing. Good news is it looks like we can get a vehicle without being dragged through the wringer too bad. Again, thank you, my mind is setting a lot easier now.


Answers:

webjnke1:  You need to speak to the Human Resources dept. where he works, before they shut their doors.
2009-08-19 10:49:34
Chosen Answer
Professor Wonderful:  Your answers can be had by calling the IRS at 1-800-TAX-1040. I call them every few months because I continue to get questions that even a professional can get wrong. Confirm these points with the IRS: First, you can have a roll-over period. That is, you can withdraw all the money available under your 401(k)'s rules of procedure. You can do anything you want with that money during the grace period the IRS allows for seeking another vehicle. ('Vehicle', here, means an investment authorized to receive roll-over funds.) You can buy an old clunker that will get him around. Then you can put the remainder into any investment you desire. Even a bank. (YUK!) Incidentally, banks do not return capital in sufficient quantity to overcome inflation. If you withdraw the corpus, and fail to roll all of it over, you will be taxed at the end of the year. That provides you with breathing room. You are going to pay the penalty and additional taxes (as if those funds were ordinary income) on any amount not rolled over. Your tax bracket in the tax year the roll-over period expires will set the taxable amount. I am not licensed outside of Nevada, so this is not an attempt to solicit business beyond the borders.
2009-08-19 11:13:31
efflandt:  One problem with a 401(k) loan is that if you are no longer employed with that employer, whether due to leaving, being fired, or closing their doors (other than a leave of absence for less than 1 year), the balance of the loan is due in a very short period of time, and if not paid back is considered a distribution (subject to tax and possible 10% penalty). You can look through IRS Publication 575 to see if you find any exceptions, but I did not. You should find out what they intend to do with your remaining 401(k) before they close up. It would be best to do a direct trustee to trustee transfer to an IRA, unless you intend to retire and need the money at age 55 instead of waiting until age 59.5. With a trustee to trustee transfer, there is no withholding. If a check is made out to you, they are required to withhold 20% towards taxes. If you roll it over to a suitable account, you would need to add the 20% back in from other source within 60 days or the withholding would be taxed/penalized. Or if you keep the distribution, the 20% withholding may not cover the actual tax/penalty.
2009-08-19 11:19:25
capixaba:  Thie quote below is from http://www.irs.gov/publications/p575/ar02.html#en_US_publink10004541 . Please link to it and read it. Also follow the suggestion of the first person to answer (it is the only one I have seen) and study the provisions of your husband's employer's plan. "Most distributions (both periodic and nonperiodic) from qualified retirement plans and nonqualified annuity contracts made to you before you reach age 59? are subject to an additional tax of 10%. This tax applies to the part of the distribution that you must include in gross income." This 10% is in addition to the income tax you will pay on the distribution of the plan. For simplicity of computation, say you are in a 20% bracket. You will pay 30% (10% + 20% income tax) of the distribution. If you are in a 30% bracket (these numbers come out of my head; I use them for eas of calculation only), you will pay 40% of the distribution. Is there no way you can roll the 401(k) over into an IRA and finance the car? Whatever, if you are in such a tight that you must consider using the 401(k) fund, you need to buy the least expensive but reliable automobile you can. Look at a stripped-down Versa, no air conditioning with low mileage, for example. If you can afford to finance something more expensive, roll your 401(k) over and save yourself a lot of money--even when taking into account the finance charge on the car. *** I just read your addendum. Speaking to the IRS makes a lot more sense than asking the question on Y!A. Nevertheless, I commend the folks who answered for their responsible comments.
2009-08-19 12:03:45