divorce help
July 2, 2010 8:50 AM Subscribe
Getting divorced and my ex wants a portion of my 401k as cash out. Should I get a loan against my 401k or take the disbursement and the tax hit?
I can afford the monthly payments, but it will be tight. I'm thinking I will save the tax penalty. What am I missing?
I can afford the monthly payments, but it will be tight. I'm thinking I will save the tax penalty. What am I missing?
If you take a loan, then change jobs, you will either have to pay the loan back in full, or you will owe taxes on the remaining balance as if it had been a disbursement.
I think you can use a QDRO to divide the 401(k) which will essentially put the burden on your ex to deal with any taxes or penalties.
posted by cabingirl at 9:00 AM on July 2, 2010 [2 favorites]
I think you can use a QDRO to divide the 401(k) which will essentially put the burden on your ex to deal with any taxes or penalties.
posted by cabingirl at 9:00 AM on July 2, 2010 [2 favorites]
Seconding lawyer. IANAL The best way to deal with this sort of division is normally a QRDO, which is something a lawyer will need to work with you on, but can save you a substantial amount of tax.
posted by Zophi at 9:01 AM on July 2, 2010
posted by Zophi at 9:01 AM on July 2, 2010
I think you can use a QDRO to divide the 401(k) which will essentially put the burden on your ex to deal with any taxes or penalties.
Yes I don't know a lot about them, but a QDRO generally specifies how the division works. That may involve your wife getting the money right away and having to pay taxes on it, getting periodic payments, or some other agreement. A lawyer should draft one that conforms to IRS guidelines and will be acceptable to your plan's administrators.
posted by burnmp3s at 9:09 AM on July 2, 2010
Yes I don't know a lot about them, but a QDRO generally specifies how the division works. That may involve your wife getting the money right away and having to pay taxes on it, getting periodic payments, or some other agreement. A lawyer should draft one that conforms to IRS guidelines and will be acceptable to your plan's administrators.
posted by burnmp3s at 9:09 AM on July 2, 2010
I am a lawyer. I am not your lawyer. This is the extent of my advice: GET A LAWYER! NOW!
I know that it may be tempting to try to "save" some money by doing your divorce on your own, but the only situation that makes any sense is if there are no assets and no kids. If you have any assets at all, please talk to a lawyer. You don't want to wind up with a tax liability that isn't yours, or dividing the property in a way that is manifestly unfair to one of you.
posted by ambrosia at 9:12 AM on July 2, 2010 [4 favorites]
I know that it may be tempting to try to "save" some money by doing your divorce on your own, but the only situation that makes any sense is if there are no assets and no kids. If you have any assets at all, please talk to a lawyer. You don't want to wind up with a tax liability that isn't yours, or dividing the property in a way that is manifestly unfair to one of you.
posted by ambrosia at 9:12 AM on July 2, 2010 [4 favorites]
If you take a loan, then change jobs, you will either have to pay the loan back in full, or you will owe taxes on the remaining balance as if it had been a disbursement.
Not always the case. My company provides a coupon booklet where you'd make the monthly payments should you leave, by your own accord or otherwise.
nthing Lawyer, btw.
posted by jerseygirl at 9:21 AM on July 2, 2010
Not always the case. My company provides a coupon booklet where you'd make the monthly payments should you leave, by your own accord or otherwise.
nthing Lawyer, btw.
posted by jerseygirl at 9:21 AM on July 2, 2010
Another lawyer checking in to tell you to do this only via a qualified marital lawyer. And ask your lawyer about a QDRO.
posted by bearwife at 9:44 AM on July 2, 2010
posted by bearwife at 9:44 AM on July 2, 2010
Response by poster: I do have a lawyer and he said this was a good option to save on the taxes. I guess I am just looking for another opinion.
Also, I suppose it really doesn't matter where the money comes from - she wants $x. My only asset available that she isn't getting already is my 401(k). If it comes from my 401(k), she wants me to be responsible for any tax or penalties and I'm trying to save as much of my assets as I can.
posted by nunyabizness at 10:20 AM on July 2, 2010
Also, I suppose it really doesn't matter where the money comes from - she wants $x. My only asset available that she isn't getting already is my 401(k). If it comes from my 401(k), she wants me to be responsible for any tax or penalties and I'm trying to save as much of my assets as I can.
posted by nunyabizness at 10:20 AM on July 2, 2010
I dissolved a domestic partnership last year. I don't think a QRDO was an option for me because of lack of recognition of the relationship by the federal government, so as part of our dissolution agreement, I signed a 5 year promissory note with a reasonable interest rate. I have a monthly payment going to my ex. Just another option to consider.
posted by elmay at 11:02 AM on July 2, 2010
posted by elmay at 11:02 AM on July 2, 2010
when I got divorced, I filed a QDRO to give her a portion of my 401k -- neither of us had to pay taxes or early withdrawal penalties ... so long as she put the money into another qualified plan. Basically, she was on the hook for what happened to the portion she received from me. My existing 401k then just dropped the amount of the check sent to her.
Kinda sucks because while cash is more of an immediate hit, that money in your 401k was going to grow quite nicely (though maybe not in this market)
posted by indigo4963 at 12:23 PM on July 2, 2010
Kinda sucks because while cash is more of an immediate hit, that money in your 401k was going to grow quite nicely (though maybe not in this market)
posted by indigo4963 at 12:23 PM on July 2, 2010
Also, I suppose it really doesn't matter where the money comes from - she wants $x. My only asset available that she isn't getting already is my 401(k). If it comes from my 401(k), she wants me to be responsible for any tax or penalties and I'm trying to save as much of my assets as I can.
Maybe the right advice is to talk to a different lawyer. Unless there are other circumstances going on, this does not seem like a fair settlement.
Retirement accounts aren't cash. If she's entitled to 50% of the account, then that's what she gets. But it is on her to pay the taxes if she chooses to convert that from 401k money to cash money.
posted by gjc at 6:58 PM on July 2, 2010 [2 favorites]
Maybe the right advice is to talk to a different lawyer. Unless there are other circumstances going on, this does not seem like a fair settlement.
Retirement accounts aren't cash. If she's entitled to 50% of the account, then that's what she gets. But it is on her to pay the taxes if she chooses to convert that from 401k money to cash money.
posted by gjc at 6:58 PM on July 2, 2010 [2 favorites]
Seconding gjc and ambrosia. But what caught my attention is the vague response of the OP in which you say that your lawyer "said this was a good option to save on the taxes." I'm not sure if you mean that taking a loan is a good option to save on the taxes or if doing the QDRO is the good option to save on the taxes.
IMHO, based on the last 15 years of being a family law attorney, the best and most efficient way of doing this transfer is to transfer ownership of her portion of the 401(k) (whether a % or a fixed $ amount) to her via a QDRO. She then becomes responsible for the taxes on the portion received by her if and when she takes a cash distribution from her portion.
As know you, 401(K) funds are tax-protected until they are distributed out of the plan. There's simply no way, EXCEPT VIA A QDRO, to transfer pre-tax 401K funds from one person to another without incurring taxes. That's why QDROs exist. Once she has her portion awarded to her via the QDRO, then she can cash it out (in which case she pays the taxes because it was her decision to cash it out, not yours), she can leave it in the 401(K) and defer taxes on it until retirement, or she can transfer it to an IRA or some other tax-protected type of account, again deferring taxes on it until retirement/withdrawal. gjc is exactly right: $1.00 in a 401K does not equal $1 in cold hard cash. (If it were the case, then we'd all plow 100% of the allowable limit into a 401K and then withdraw it to avoid income taxes; congress may be stupid, but not that stupid).
* Remember that all of this concerns only taxes. There's also the issue of the 10% penalty for early withdrawal that will have to be paid. BUT, if she does it right, she can avoid that 10% penalty (paying only taxes) if she does decide to cash it out now because she's doing it incident to a divorce, in which case the penalty can be avoided.
The bottom-line on all of this is that the transfer should be made in a way that puts the taxes with the person who makes the decision to cash out his/her share.
Again, IANYL.
posted by webhund at 10:37 PM on July 2, 2010
IMHO, based on the last 15 years of being a family law attorney, the best and most efficient way of doing this transfer is to transfer ownership of her portion of the 401(k) (whether a % or a fixed $ amount) to her via a QDRO. She then becomes responsible for the taxes on the portion received by her if and when she takes a cash distribution from her portion.
As know you, 401(K) funds are tax-protected until they are distributed out of the plan. There's simply no way, EXCEPT VIA A QDRO, to transfer pre-tax 401K funds from one person to another without incurring taxes. That's why QDROs exist. Once she has her portion awarded to her via the QDRO, then she can cash it out (in which case she pays the taxes because it was her decision to cash it out, not yours), she can leave it in the 401(K) and defer taxes on it until retirement, or she can transfer it to an IRA or some other tax-protected type of account, again deferring taxes on it until retirement/withdrawal. gjc is exactly right: $1.00 in a 401K does not equal $1 in cold hard cash. (If it were the case, then we'd all plow 100% of the allowable limit into a 401K and then withdraw it to avoid income taxes; congress may be stupid, but not that stupid).
* Remember that all of this concerns only taxes. There's also the issue of the 10% penalty for early withdrawal that will have to be paid. BUT, if she does it right, she can avoid that 10% penalty (paying only taxes) if she does decide to cash it out now because she's doing it incident to a divorce, in which case the penalty can be avoided.
The bottom-line on all of this is that the transfer should be made in a way that puts the taxes with the person who makes the decision to cash out his/her share.
Again, IANYL.
posted by webhund at 10:37 PM on July 2, 2010
This thread is closed to new comments.
posted by Hanuman1960 at 8:57 AM on July 2, 2010 [3 favorites]