Question

I have some IRS debts and other outstanding loans, to the tune of about $52,000, that I would desperately like to clean. I’m getting further and further into debt with late fees on monthly payments that I cannot really make right now with the reduced hours we are working due to the pandemic. I’m 51 years old.

In the CARES Act, I see the 10% penalty suspended - have the hardship requirements been relaxed as well? The wonderful state of Louisiana where I live has now suspended my driver’s license because I had to stop making payments on my income tax bill because of the reduced hours we are now working. Same with a couple of other loans I have that are outstanding and are charging me daily late fees for not making payments anymore.

My credit is ruined and I’m getting further and further in debt due to this pandemic and reduced working hours. Can I pull out $52,000 from my 401(k), which currently sits at $280,000 with about 15% growth this year?

I’m restricted at work, getting further and further into debt every day, yet my 401(k) account is booming. What’s even worse, the lady that handles the 401(k) accounts where I work says nothing has been changed in the 401(k), that I don’t qualify to pull money out, and if I do, it comes with a not 10, but 20% penalty. I have a few friends that have recently pulled money from their 401K’s to clear out their debt with only taxes paid with no penalties.

Answer

“Unfortunately, the distribution provisions to which you refer expired on December 30,  2020,” says Denise Appleby, CEO of Appleby Retirement Consulting Inc. “This provision allowed eligible individuals to take a coronavirus related distribution of up to $100,000.” She notes that as long as the amount qualified as a coronavirus related distribution it would be exempted from the 10% early distribution penalty, in addition to qualifying for other exception provisions.

Appleby adds, “I recommend consulting with your tax adviser to identify other possible solutions.” These might include taking a loan from your 401(k) if available or a hardship withdrawal from your 401(k). If available, the hardship withdrawal would be subject to the 10% early distribution penalty “unless you qualify for an exception or other solutions outside of your retirement account that could help with debt management.”

“You might also want to talk to a debt counselor,” suggests Appleby, “who should be able to provide solutions that do not strain your finances.”

She adds, “I really hope your circumstances improve significantly in the very near future if not immediately.”

Got questions? Get answers!

Email Robert.Powell@maven.io.

More from Retirement Daily

Articles

Is Your Roth IRA a Tax Strategy or Tax Trap?

Two Cases When a Roth IRA Conversion Makes Sense

How to Find a College that Fits Your Budget and Your Child

How to Create a Tax-Efficient Retirement Income Plan

Ask the Hammer

Should Our Son Delay Attending College?

Ask Bob

Where Can We Find Help for Supporting Elderly Parents When We Retire?

NextGen Money

How to Buy Your First Home

Retirement Research

What's the Value of Social Security and Medicare Lifetime Benefits?

Learning Center

How to Build a Retirement Income Plan

Question

I have some IRS debts and other outstanding loans, to the tune of about $52,000, that I would desperately like to clean. I’m getting further and further into debt with late fees on monthly payments that I cannot really make right now with the reduced hours we are working due to the pandemic. I’m 51 years old.

Member Exclusive

Get Access to Our Exclusive Content