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Wendy Reed
Wendy Reed, Enrolled Agent
Category: Tax
Satisfied Customers: 3346
Experience:  15+ years tax preparation and tax advice.
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I was laid off in 2008, with credit card debt close to $100,000.00.

Customer Question

I was laid off in 2008, with credit card debt close to $100,000.00. My 401K is close the that amount, I have a job now. And want out from this debit. I was wondering how much would the 401K money be taxed, if I withdraw it to pay off my debt? I was going to file for Chapter 7 at the time of my layoff, but now that I work Legal helpers say I can't. Chapter 13 is the solution. I beg to differ. What do you think?
Submitted: 5 years ago.
Category: Tax
Expert:  Wendy Reed replied 5 years ago.

Thank you for giving me the opportunity to assist you. I will give the best answer that I can with the information provided.


I would advise against withdrawal of your 401k. Presuming that you are under 59 1/2 and that you don't have any exceptions to the early withdrawal penalty---the 401K will be taxed at ordinary income rates (possibly as high as 28% or more depending on your other income) plus 10% early withdrawal penalty and state tax. You stand to lose close to half of what you have painstakingly invested, and still have credit card debt.


Please consider trying to negotiate a settlement with the credit card company (they may be willing to accept a payoff of a lesser amount) and see if you can borrow from your 401K instead of withdrawing the whole amount. A loan is not a withdrawal (as long as you stick to the repayment plan) and you will actually be paying yourself back.



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