Money question, Penalty for taking money from 401k...

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Coastie,

Many here are quoting the 10% withdrawal penalty as a foregone conclusion.



Don't be so hasty. You may be able to get the money penalty free, though not tax free.



As part of your divorce, your attorney can draft whats known as a QDRO Qualified Domestic Relations Order. This QDRO will outline the terms of the transaction and is filed along with your divorce and sent to your plan administrator. A lump sum will then be given post-divorce from the plan administrator to the receiving spouse from the 401k of the other spouse. By using the QDRO the receiving spouse would only have to pay the taxes on the money and not the 10% early withdrawal penalty. It is important to note, this can only be done for divorcing couples and not be used as a legal end-around to avoid paying early withdrawal penalties.
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Checkou QDRO with your accountant.



Google that sh!t.



TJR



 
TJR, I believe this relates to a divorcing spouse receiving retirement benefits for retirement, which taxes are due. In the course of a settlement where one owes the other monies related to the divorce, the receiving spouse is not obligated to pay taxes for a settlement, such as money owed to settle common property issues. If Coastie is receiving money for retirement, such as a spouse would receive a pension, the taxes are paid by the recipient, the same as alimony. However, his wife is using her 401 to pay a debt related to a settlement as she owes him money for the house. The money to purchase the house have already been taxed.



Personally, I would not accept settlement money for which I would have to pay taxes, relating to common property, unless previously required by IRS, such as selling a business, etc. She owes the money and it is her problem how she acquires it. Common monies has already been taxed when earned, 401K money has not.



I do agree, see an accountant. Divorce is expensive enough without having to pay someone's elses taxes.



Good Luck Coastie, I know how much this sucks...
 
Les,



As I read up on QDRO it seems that it only saves a divorced recipient from the 10% penalty.



Taxes, if liable, would still be due. I'm guessing a good CPA could figure out all the right documentation to avoid the taxes due, too, as long as the recipient rolled the funds into some retirement vehicle, like an IRA.



But, that is not what Coastie asked about.



TJR
 
This little exercise is just a sliver of an example as to why the Fair Tax will never be passed. The Fair Tax would put too many accountants and lawyers out of business. :(
 
TJR



Qualified Domestic Relations Order?

A "qualified domestic relation order" (QDRO) is a domestic relations order that creates or recognizes the existence of an alternate payee's right to receive, or assigns to an alternate payee the right to receive, all or a portion of the benefits payable with respect to a participant under a retirement plan, and that includes certain information and meets certain other requirements.



Reference: ERISA 206(d)(3)(B)(i); IRC 414(p)(1)(A)
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This is for a person receiving retirement benefits, not a pay-off from a divorce settlement regarding the division of marital assets.



But, that is not what Coastie asked about.
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He asked about receiving funds from his wife's retirement account to settle a debt. How she funds this is her business, and if she wants to use retirement money, pay the penalty and taxes, again, her business.



If I you you $10,000 and I take the money out of my retirement to pay you, you don't owe the taxes and penalty, I do. That was the question.



It's very possible she is trying to get him to agree to accept less money to pay the penalty, in order for him to get his money. Typical divorce settlement request, possibly from her attorney.
 
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Many interesting bits of info...



And I am getting the money via her 401k as she does not have the physical cash. I did not think about the fact that in reality I am receiving less money based on I will have to pay taxes on the money later. That said, getting nearly 30 grand now and letting it ride in my TSP I would certainly hope it makes considerably more than what the cost will be in the form of taxes when I do draw it out, (Will retire in 12 yrs from now, so the money will have a full 11 yrs to incur whatever profits (or losses) that my TSP will provide).



All good info and even if I do nothing, this does help me better understand things.



Thanks...
 
is part of the settlement requiring you to put the funds into your TSP?? Just because she has to withdraw the funds from HER 401k to pay you per the divorce settlement DOES NOT mean you have to put the funds into YOUR TSP. If the divorce settlement does NOT require you to put the funds into your TSP, you can pay off the bills you want with the funds from your ex to make your life a bit easier, and do whatever you want with the balance. As to whether these funds are considered taxable income to you or not is something you should talk to your tax man about. If she pays you with funds obtained from her 401k, she will have to pay income tax and the related penalties on the amount withdrawn from HER 401k, but you don't have to put that $$ into your TSP unless you want to as an additional contribution (if allowed under TSP rules & regs)
 
Jim P.

No, at this point, it is just assumed that I would so that I would not suffer the loss in penally/taxes.



But I can do whatever I want with the money.



State of Ohio says she can pull the funds from her account if the intent is to place them in my account in the form of a settlement and NOT pay any penalty to do so. The simple fact she does not have the money in the form of cash, this is the one way we came up with for me to actually get the money...
 
Though that is simple enough Bill, it is not practical.



It is not my intention to put such a financial strain on her that it rolls onto the kids, who are living with her in the house.



If it was a business partner kind of thing, then I would not care about the ramifications of putting financial stain onto the partner.



Sooo, I am trying to do this in a kind way if at all possible, but not to the degree that I get rolled over....
 
I do not think you would suffer any taxes or penalties since the 401k is in her name, if you are considering agreeing to the deposit into your TSP so that your ex will avoid any taxes/penalties, check to make sure you will not have any "excess contributions" to your TSP, as there may be some penalties for "excess contributions". It sounds like the state of Ohio has a personal income tax, correct?? If so, make sure everything is good for YOU at the state level and federal tax levels, best of luck with it all. Never fun is it
 
Jim.

State of Ohio does have Personal Income Tax. Also, there is no limit as to what can go into my TSP when it is a result of a divorce or dissolution settlement. Traditionally, there is a $5000 dollar cap when it comes to the donations made to your TSP/401k's.



The cap is waived when it is a result of a settlement.



I have checked into that but did not ask about any penalties if I am to simply take some in the form of cash..



I will be calling my accountant tomorrow...
 
When I settled my divorce in june. I had more 401k and anuities in my name than the wife.

I had to get the mediation written for her to roll what she got into a shelter in her name. Otherwise it would be considered a distrubution to me. The tax and penalty would have fell on me.:(
 
Seriously guys,



No post here has offended me. I am taking it all in.



Yes, their are kids involved, my bad for not mentioning them.



None of us are fighting, wife is just not happy. Been married 25 years, been together for over 30. Two girls, 12 and 14. I talk to them every night and see them almost every other night.



So actually we are all doing well from that aspect...
 
If she is doing a wire-transfer to your account, there should be no penalties for either of you.



I don't know the divorce laws, but in general, if the 401k never touches your/her hands, there isn't a penalty as there is never an income.
 
One consideration, since you will be paying child support, is to get the $7000 you need and let the rest run out over time (with interest) as payment. This reduces the strain on her and some of your future obligations are met.
 
Les,

I had been thinking about something like that as well. The ONLY catch is she says she needs monthly money, not 401k money.



So we need to find a way for that to happen.



Yes, we could pull th money and deposit it into her account and just let it run its course. But,, No matter how we do that someone is getting less money as there will be taxes or penalties that come out of the money.



Soooo, it is an option, but don't have a good answer as of yet on that option.
 

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