- Congress permits two types of hardship distributions.
- File a Form 5329 to report the tax on early distributions.
- Your plan administrator will send you a Form 1099-R.
BILL'S ANSWER
In your question, you mention "proceedings," by which I assume you mean bankruptcy proceedings, since you also mention the large amount of debt with which you are struggling. Because I do not know the details of your situation, I certainly do not want to contradict the advice your attorney has provided you in regard to protecting your assets and putting you in the best position to successfully proceed with your retirement plans. If you do not think that your attorney is giving you sound advice, I recommend that you consult with another attorney for a second opinion, giving you the opportunity to fully explain the details of your situation to another legal professional.
For a referral to an attorney for a second opinion, you can contact you local or state bar association's attorney referral service; you should be able to find the bar association's contact information in the phone book or by searching online. Most referral services offer a free or low-cost initial referral, so seeking the advice of another attorney should be relatively inexpensive.
I cannot provide you with legal advice, but it sounds to me like the approach proposed by your current attorney may be sound. If the facility to which you wish to retire has a limit on the assets its residents can own, converting the funds in your 401k to an annuity may be a wise choice. Although exempt in bankruptcy due to court rulings regarding ERISA accounts, 401(k)s and other retirement accounts are often viewed as assets for purposes of benefit eligibility, which may affect your ability to retire to the community of your choice.
However, annuities are frequently not counted among assets for these purposes, since, unlike a 401(k), you do not have the right to access the principal funds once they are placed in an annuity; you give up the right to access the funds in return for a guaranteed income. Since you no longer can access the funds, most plans do not view annuities as assets, which may be why your attorney is recommending that you use an annuity. Because I do not know the specific type of annuity you are considering, I cannot tell you exactly how the account will be treated in your bankruptcy proceedings, which is probably the primary factor in deciding if using an annuity makes good sense. Again, I strongly encourage you to discuss the matter further with your attorney, and if you are not fully satisfied with his or her answer, to seek a second opinion.
I wish you the best of luck in your retirement, and hope that the information I have provided helps you Find. Learn. Save.
Best,
Bill
www.bills.com
August 06, 2010
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