401k and child support
February 3, 2012 10:30 AM   Subscribe

Asking for a friend: If I liquidate my 401k, will the IRS take the money for back child support? How about for student loans?
posted by rockhopper to Work & Money (6 answers total)
Lawyer. Accountant. Probably both.

Metafilter knows nothing of your friends depth of arrears, etc. Tell your friend to contact a professional qualified to offer advice.
posted by bilabial at 10:50 AM on February 3, 2012 [1 favorite]

I have no substantive first hand knowledge (indirect only ) re: this issue but I am guessing yes unless the 401K is moved to some other qualified pension instrument. Liquidate suggests early with drawl with tax and early termination penalty. I am having a hard time imaging why one would think it would not be treated as any other cash asset in the case of liquidation.
posted by rmhsinc at 10:54 AM on February 3, 2012

IANAL, but I can answer the question, as it pertains to child support, unequivocally (but only for Texas) yes. Yes they will. But it's not the IRS that takes it, it's the state.
posted by holdkris99 at 11:05 AM on February 3, 2012

Your friend is talking about something called the Treasury Offset Program, or sometimes called Tax Refund Intercept Program, and he should use these phrases when speaking to a tax professional about this. It appears that while any tax refunds your friend would get would indeed be subject to these programs, it seems unlikely that a 401k distribution, early or otherwise, would be subject to the programs. Here's one of the implementing federal regulations on it. According to the reg, the program applies to "all Federal payments" with a number of exceptions. A 401k distribution wouldn't seem to be a "federal payment." The distribution comes from whoever the 401k is invested with. The Offset Progam apparently deals with payments from the government itself. A tax refund from the treasury department is that type of payment. A 401k distribution probably isn't.

But I'm not a tax professional, this isn't tax or legal advice, it's just an attempt to give your friend a better chance to have his question answered by someone who is. So when he does go to see a professional about this, he'll have a more specific question to ask.
posted by MoonOrb at 11:21 AM on February 3, 2012 [4 favorites]

Former divorce lawyer here. IANYL.

MoonOrb has the correct answer but you need to know a couple of things. First, what happens is that once or twice a year, your state child support recovery unit will certify a list of delinquent support payors to the IRS. It is not a "real time " sort if communication and it also generally requires that the state be "enforcing" your order, which may or may not be automatic depending on where you live. generally there's a dollar threshold the delinquency has to hit to get on the list the state sends to the IRS.

Second, it's really easy to get an order allowing a support recipient to grab money directly from a 401(k) or other defined contribution account even if you do not withdraw it first. The really big down side to this is that YOU will be the one who gets the tax hit on these funds, not the recipient.

When I was in practice, I did this all the time, so don't feel the funds are out of reach just because the funds are in a tax qualified account like a 401k.
posted by webhund at 12:07 PM on February 5, 2012

Sorry. My post should say "your friend" not "you."

And in further rereading, the treasury offset program generally only applies to federal payments such as tax refunds and social security benefits as moonorb said, not withdrawals of 401k accounts.
posted by webhund at 12:11 PM on February 5, 2012

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