Home     Forum     401k     401k Rollovers
    Register   Login   Members   Search   FAQs     Recent Posts    




401k Hardship Withdrawl and Proof for Audit

Reply to topic
Money Talk > Taxes

Author Thread
Effen1
New Member


Cash: $ 1.65

Posts: 8
Joined: 17 Nov 2012

401k Hardship Withdrawl and Proof for Audit  Reply with quote  

I am currently delinquent 6-7 months on my mortgage and it is in the process of foreclosure. I have been working the my retirement provider on exercising a hardship withdrawal and providing necessary paperwork and agreeing to pay the additional 30% in fees at the time of payout which is the most one can pay on the withdrawal. If the legitimate paperwork is approved by 401k administrator and I end up not specifically paying for the past due mortgage amounts used to determine the hardship withdrawal legitimacy, am I at risk at an audit? In other words, I paid all the fees and provided correct paperwork ad I didn't lie to gain funds for hardship under the foreclosure circumstance yet I don't choose to pay the mortgage....is this wrong? Foreclosure is a complicated process and I have an immediate need for the funds but I am trying to re-mod the loan, look at options, etc. I don't want to pull the trigger and use funds yet. My concern is I will be able to prove the hardship, get funds, pay fees but then later, if I get audited, while approved and taxes paid, they do a bank trail and find it wasn't used at that time. Does the IRS care about that....to go to such lengths to determine if used in a specific way if appropriate taxes were paid and approvals by 401k administrator were completed?

I would appreciate the forums advice and insight. Thank you
Post Sat Nov 17, 2012 1:54 pm
 View user's profile Send private message
oldguy
Senior Member


Cash: $ 720.60

Posts: 3505
Joined: 21 May 2006
Location: arizona
 Reply with quote  

quote:
and agreeing to pay the additional 30% in fees at the time of payout which is the most one can pay on the withdrawal


The provider will withhold 30% - but that isn't the "most one can pay", you must pay your 10% penalty, your Fed Tax of maybe 20%, and your State Tax. So, in most cases, 30% to 40%.

quote:
My concern is I will be able to prove the hardship, get funds, pay fees but then later, if I get audited, while approved and taxes paid, they do a bank trail and find it wasn't used at that time.


Well, if you stiff your lender out of several months of payments plus an equity shortfall - and use a hardship withdrawal for other things - yeah. It won't be an audit, they will simply compare the lender's 'loss' (a tax write-off) to your return - and bill you for the shortfall and the taxes/penalty.
Post Sat Nov 17, 2012 3:04 pm
 View user's profile Send private message
Effen1
New Member


Cash: $ 1.65

Posts: 8
Joined: 17 Nov 2012

 Reply with quote  

Thanks do much for the quick response oldguy! I realize the $ consequence for withdrawal is enormous but I have an immediate need for the $ now which is why I chose to try to seek withdrawal via hardship. I dont know much about foreclosures but we are severely late and possibly have a preforclosure status, I dont know exactly. Goal was to try to access the funds for immediate need.

If somehow I am approved, I want to try to understand how this may come back to bite me and how in the near or late future. Obviously, I hope to pay my dues (appropriate taxes) nd get approvals to not warrant an audit at all. If audited, I was just hoping that It wouldnt go as far as to immediately prove the lender was paid.....foreclosures take so long and eventually payment will be made but tgat may not be good enough I fear.
Post Sat Nov 17, 2012 4:54 pm
 View user's profile Send private message
coaster
Senior Advisor


Cash: $ 1626.30

Posts: 7990
Joined: 11 Oct 2005
Location: Wisconsin
 Reply with quote  

quote:
Originally posted by Effen1
If somehow I am approved, I want to try to understand how this may come back to bite me and how in the near or late future.

If I understand the proposed actions correctly, the operative legal words applicable are 'misrepresentation', 'fraud', and 'breach of contract.' If, how and when they come back to bite are anybody's guess. The probability of being foreclosed is 100%. The probability of civil or criminal action on the other is unknown. The consequences of a foreclosure are 100% known. The consequences of the other are completely unknown. So, completely disregarding the moral and ethical issues, it appears the two choices are going with the completely known or with the completely unknown.

Such is life.

Perhaps in such a case, where the probabilities of the legal and financial consequences cannot be quantified, it is the moral and ethical issues that should swing the decision. Inputs that should never be disregarded, anyway, IMO.

(And frankly, I wouldn't care to mess around with anything where the IRS might come in as my adversary, regardless of any other issues).

~Tim~
Post Sat Nov 17, 2012 5:43 pm
 View user's profile Send private message
coaster
Senior Advisor


Cash: $ 1626.30

Posts: 7990
Joined: 11 Oct 2005
Location: Wisconsin
alternatives?  Reply with quote  

The Federal Government is supporting all kinds of programs to help people stay out of foreclosure. I wonder if any of those options are an alternative?

http://www.freddiemac.com/avoidforeclosure/alternatives_to_foreclosure.html

~Tim~
Post Sat Nov 17, 2012 6:22 pm
 View user's profile Send private message
Effen1
New Member


Cash: $ 1.65

Posts: 8
Joined: 17 Nov 2012

 Reply with quote  

Again, thank you for your insight. Regarding the foreclosure, we feel we are doing ok managing the difficult, complicated process pretty well and to best of our ability. I just am asking for the funds now by following the process required. I wouldn't think it would be too much issue of the funds after distribution after following the rules of the IRS with the 401k administrator as the lead in the process. Just peace of mind I guess. Morally, I feel it is not ill conceived but I guess that is subjective.

Someone told me that it is just another distribution and if guidelines are met up front, they dont care how one chooses to use distribution. Not much on web based on it because most issues searched and found are typically people lying w forms, not paying 1099R etc. i am not doing that.
Post Sat Nov 17, 2012 7:36 pm
 View user's profile Send private message
Effen1
New Member


Cash: $ 1.65

Posts: 8
Joined: 17 Nov 2012

 Reply with quote  

Coaster thank you for provifing he link to Fredfie Mac.....ver hood information on.there and applicable to probably most people having similar issues with foreclosure.
Post Sat Nov 17, 2012 10:07 pm
 View user's profile Send private message
Effen1
New Member


Cash: $ 1.65

Posts: 8
Joined: 17 Nov 2012

 Reply with quote  

Really trying to find an instance similar to mine where it states consequences, if any, if one manages the approved, hardship payout as they see fit. From a tax perspective, I am paying the penalties upfront to the 401k provider....certainly I will get dinged on added income and would move tax brackets but that will be adjusted and paid at tax filing time. Has anyone worked with or known anyone who was affected with a similar circumstance?

Awhile back, I used to know a guy who worked for IRS too.....wished I still kept in touch with him. Urgh
Post Sat Nov 17, 2012 10:17 pm
 View user's profile Send private message
coaster
Senior Advisor


Cash: $ 1626.30

Posts: 7990
Joined: 11 Oct 2005
Location: Wisconsin
 Reply with quote  

Are the amounts involved large enough to make paying for legal advice worthwhile?

Another thought - the purpose for which you really wish to use the money: could it also be a hardship (as defined by the rules that allow hardship withdrawals ) - maybe another reason for legal advice.

~Tim~
Post Sat Nov 17, 2012 11:18 pm
 View user's profile Send private message
Effen1
New Member


Cash: $ 1.65

Posts: 8
Joined: 17 Nov 2012

 Reply with quote  

Hard for a novice like me to determine. I is a 9k payout but 13k total damage with fees. My hope was to gain some expert feedback on this forum. Seems small for what I might expect would be worth the full court press. Maybe I will search for a free consultation to aid.
Post Sun Nov 18, 2012 12:31 am
 View user's profile Send private message
coaster
Senior Advisor


Cash: $ 1626.30

Posts: 7990
Joined: 11 Oct 2005
Location: Wisconsin
 Reply with quote  

Actually, in the seven years I've been here this is the first time this particular question has come up.

In my opinion, that amount would not warrant retaining an attorney. What you'd spend on the legal fees would most likely outweigh what might be saved.

But spending several hundred on professional legal opinion / advice for a brief review and half-hour consult wouldn't be a bad idea. You might get a more definitive answer to your questions about consequences; also you might get advice on better ways to do what you want to do. I think it's worth a shot. Free advice is usually pretty much worth what you pay for it. Wink

~Tim~
Post Sun Nov 18, 2012 6:57 am
 View user's profile Send private message
Effen1
New Member


Cash: $ 1.65

Posts: 8
Joined: 17 Nov 2012

 Reply with quote  

Laughing

Interesting that it never came up ever. i looked and looked all over web and found scary stuff because people were not filing their 1099R, creating false documents, etc. However, nothing with how the distributions were used after.....no language.....nothing I can leverage on my own.

Just my luck.....or lack thereof. Rolling Eyes
Post Sun Nov 18, 2012 12:50 pm
 View user's profile Send private message
coaster
Senior Advisor


Cash: $ 1626.30

Posts: 7990
Joined: 11 Oct 2005
Location: Wisconsin
 Reply with quote  

Well, then, don't rely on luck or free "advice".

You said you came here seeking expert advice. Expert advice tailored to a specific and individual situation is given only in the context of a client relationship with a properly credentialed and experienced professional who has expertise in the situation for which such advice is sought.

None such is available for free on the internet.

~Tim~
Post Sun Nov 18, 2012 6:19 pm
 View user's profile Send private message
clydewolf
Senior Member


Cash: $ 50.25

Posts: 248
Joined: 27 May 2012

 Reply with quote  

quote:
Originally posted by Effen1
Laughing

Interesting that it never came up ever. i looked and looked all over web and found scary stuff because people were not filing their 1099R, creating false documents, etc. However, nothing with how the distributions were used after.....no language.....nothing I can leverage on my own.

Just my luck.....or lack thereof. Rolling Eyes


That is because Hardship Distributions are not generally done. Hardship Distributions are considered the last resort.

Typically the employee must exhaust all other avenues of using their assets before a 401k plan will make a Hardship Distributions.

It probably does not matter that you indicate the money is needed to avoid foreclosure, and spend the money for food, as long as you avoid the foreclosure.
Does your 401k have a loan feature? Borrow the money.

The Hardship Distribution can not be paid back to your 401k account, it is gone forever.

Foreclosures take time. While your time may be running out, you can or could have sold the house.

Why not use a CC loan?
Post Sun Nov 18, 2012 9:02 pm
 View user's profile Send private message
Effen1
New Member


Cash: $ 1.65

Posts: 8
Joined: 17 Nov 2012

 Reply with quote  

Thanks and yeh all other money avenues have been exhausted sadly. CC load would be great if credit score didn't tank from lack of payment.

It is good to hear from someone that the payment received isn't really cared for as long as the property doesn't foreclose.

Right now, we are working closely with the lender to save the home, but modify the terms so that it is more feasible to pay. We are very late and I do not want it to go into foreclosure so to gain access on some of my retirement, I am trying to exercise and prove via the foreclosure clause. My hope is the documentation provided by my lender will be sufficient. If they are, we are going to continue working with lender on solution. We were advised by our lenders case manager to hold on to 401k funds for the moment and wait for a result. Obviously, this can go many directions. My concern then comes down the road a year or two.....say we got re-mod, paying for a few months, market tanks, we get into another crunch and house falls into foreclosure year or two out. We used funds to prevent foreclosure but it had no longterm sustainability. Have to believe I should be ok? We used $ to prevent foreclosure.

Sorry for the rambling. I do hope this is helpful for others now or for future. Thanks for everyones patience....and if course, advice.
Post Mon Nov 19, 2012 1:35 pm
 View user's profile Send private message

Goto page 1, 2  Next
Reply to topic
Forum Jump:
Jump to:  
  Display posts from previous:      





Money Talk © 2003-2016