Johnny O
Well-Known Member
This is why we have divorce lawyers. Take the money, she pays the penalty. Whether she likes it or not doesn't matter. Her feelings are no longer your concern.
Money question, Penalty for taking money from 401k...
- Thread starter Kevin Palmer
- Start date
Help Support Ford SportTrac Forum:
This is why we have divorce lawyers. Take the money, she pays the penalty. Whether she likes it or not doesn't matter. Her feelings are no longer your concern.
Absolutly! Watch the last scene in "Gone with the Wind".
Tom
Johnny O
Well-Known Member
I'm probably not telling you anything you don't know, but....
Assuming OH's divorce law's are similar to PA's, your marital property (which includes house) is worth $x. Subract whatever you both owe on said marital property, then split the rest 50/50. Now then, how she pays the balance she owes you doesn't matter as long as Coastiejoe gets paid. Possibly refinancing the house would cost her less than 401k penalties, I don't know. As long as you get a cashier's check in your hand for the proper amount and don't have to pay any taxes or penalties youself, it's all good. But I wouldn't accept any less than that and say so to your lawyer.
In my case, she moved to another state and I got hosed because I own a business. I could have sold my house but I'd still need a place to live. I could have sold my company (if anyone wanted it
) but I'd still need a job. So I opted to borrow and refinance so I could keep what I had. She didn't want stuff, she just wanted money.
Assuming OH's divorce law's are similar to PA's, your marital property (which includes house) is worth $x. Subract whatever you both owe on said marital property, then split the rest 50/50. Now then, how she pays the balance she owes you doesn't matter as long as Coastiejoe gets paid. Possibly refinancing the house would cost her less than 401k penalties, I don't know. As long as you get a cashier's check in your hand for the proper amount and don't have to pay any taxes or penalties youself, it's all good. But I wouldn't accept any less than that and say so to your lawyer.
In my case, she moved to another state and I got hosed because I own a business. I could have sold my house but I'd still need a place to live. I could have sold my company (if anyone wanted it
) but I'd still need a job. So I opted to borrow and refinance so I could keep what I had. She didn't want stuff, she just wanted money.
Last edited by a moderator:
Gavin Allan
Well-Known Member
Hey- the government needs the money too. Quit being so stingy. Do you think bailing out Wall Street and GM and Chrysler was free? Do you think Trillions spent on the stimulus grows on trees? :lol::lol:
Gavin Allan
Well-Known Member
If the owner of the 401K is less than 59.5 years old when they withdraw money, they will immediately taxed 20% So if you withdraw $10K you only get $8k Plus they will be assessed a 10% pentalty that will be collected when the income taxes are filed for that year, but there is an option to prepay the pentalty, but why would you want to do that?
When taxes are file by the owner of the 401K, it will be consided just like $10K of income which $2K was paid i taxes.
....Rich
When taxes are file by the owner of the 401K, it will be consided just like $10K of income which $2K was paid i taxes.
....Rich
Kevin Palmer
Well-Known Member
Rich,
If the transfer is due to a result of a settlement, there is zero cost or penalty to go from one 401k to another, of a TSP in my case.
It only become an issue if the receiving party wants it as CASH, (as opposed to deposited into the 401k/TSP).
Further, if the payment is a result of a settlement, I can take it solely as cash with no penalty, that said, it become income immediately and I will be responsible for the taxes in the form of income. And for me that is about 30% tax bracket.
Sooo, I was trying to see how much I would have lost due to paying the income taxes as compared to continuing to pay my bills with their present int rest rate.
I was looking to simply get rid of a few bills and simply have more monthly money in general.
However, a quick look seems to be continue how I am presently going and depositing all of the money into my TSP.
By about $2000. That is based on I will have every ounce of debt I owe paid of in 1 year and 1 month barring no changes or surprises...
If the transfer is due to a result of a settlement, there is zero cost or penalty to go from one 401k to another, of a TSP in my case.
It only become an issue if the receiving party wants it as CASH, (as opposed to deposited into the 401k/TSP).
Further, if the payment is a result of a settlement, I can take it solely as cash with no penalty, that said, it become income immediately and I will be responsible for the taxes in the form of income. And for me that is about 30% tax bracket.
Sooo, I was trying to see how much I would have lost due to paying the income taxes as compared to continuing to pay my bills with their present int rest rate.
I was looking to simply get rid of a few bills and simply have more monthly money in general.
However, a quick look seems to be continue how I am presently going and depositing all of the money into my TSP.
By about $2000. That is based on I will have every ounce of debt I owe paid of in 1 year and 1 month barring no changes or surprises...
Les
Well-Known Member
Coastie, still don't understand why the money is considered income for you when this is part of a divorce settlement. This is money she owes taxes on, not you.
Kevin Palmer
Well-Known Member
State of Ohio says it WILL be (income) once I cash it out of my TSP as it has NEVER been taxed.
Thus, if I take it now as cash, the tax has to be paid on it.
I am sure that my ex can pay the tax, but in Ohio they do it where the actual value is transfered as the spouse does not have the cash, as in money in the bank.
Thus, at some point, it must be taxed. And, looks like I eat the tax be it now or latter for the simple fact she does not have the money in liquid capital.
Not saying it is "right" or "fair," just they way it often goes down when they do not have the actual money.
Thus, if I take it now as cash, the tax has to be paid on it.
I am sure that my ex can pay the tax, but in Ohio they do it where the actual value is transfered as the spouse does not have the cash, as in money in the bank.
Thus, at some point, it must be taxed. And, looks like I eat the tax be it now or latter for the simple fact she does not have the money in liquid capital.
Not saying it is "right" or "fair," just they way it often goes down when they do not have the actual money.
Last edited by a moderator:
Thomas Rogers
Well-Known Member
Coastie,
Assuming we are talking beyond the example of getting cash-in-hand (i.e. "cash out"), and now talking about how to split the 401k so that you don't pay penalties or taxes now, then I suspect you still aren't asking the right questions. If you are asking questions of your accountant of the type "if I take the cash...", or "if I cash out the 401k...", then you might not be getting the answers you want.
Divorces are commonplace these days. 401k accounts, though in a single name are often considered "joint property" in divorce settlements.
With that said, I would be very surprised to find that most states don't provide some mechanism for a 401k to be divided, and part of the 401k rolled over into a new retirement vehicle for one spouse, and the remainder to the other spouse.
Put simply, it happens so often, there has to be a way to roll these things over as part of a divorce settlement such that there are no penalties, nor taxes at the time of settlement. Taxes would then be paid when the divorced couple take their withdrawals years later...typically when their respective tax situations make it less of an issue.
UPDATE: Again, talk to a legit accountant about QDRO, and see the link below.
The article below clearly states that one of the exceptions for the withdrawal penalty is a divorce.
So, with a QRDO, you save the 10% penalty.
As for taxes, since the QRDO will be a document showing a distribution from her qualifying retirement account to YOU as the payee, you need simply ROLL that money over into an IRA and avoid paying taxes on it at this time (that's me speaking, but I am not a CPA...but a CPA should tell you the same thing).
However, if you want to SPEND the money now, then you have to pay taxes on it first. The taxes will then be YOUR responsibility, not her's, as it is YOU that is deciding to spend YOUR money now...money that was not yet taxed. (again, not a CPA, but that seems fair and legit to me).
I did quite a bit of research on QRDO. A QRDO is the divorce settlement document that is used as part of the withdrawal. If spouse A has a 401k worth $20,000, then a QRDO is drafted that gives spouse B a $10,000 withdrawal from that 401k account. Spouse B gets that $10,000 check as part of the settlement, and if they don't want to pay taxes on it they need simply roll it over into a qualifying retirement account (seems to me). That leaves $10,000 in the account, that the owner, spouse A, can do whatever they want with, but I assume most just keep the account active as long as employed by the company running the 401k.
Other's above are saying that you shouldn't be liable the taxes, that she should, but that simply doesn't make sense to me. Yes, it was her 401k, but the assets are shared marital assets...that is why you are getting some of the 401k balance in the settlement. Whether you choose to cash out or roll over the money you get is up to you, and it's your money. You will pay the taxes on your money, now, or later, as will she on her's.
TJR
Assuming we are talking beyond the example of getting cash-in-hand (i.e. "cash out"), and now talking about how to split the 401k so that you don't pay penalties or taxes now, then I suspect you still aren't asking the right questions. If you are asking questions of your accountant of the type "if I take the cash...", or "if I cash out the 401k...", then you might not be getting the answers you want.
Divorces are commonplace these days. 401k accounts, though in a single name are often considered "joint property" in divorce settlements.
With that said, I would be very surprised to find that most states don't provide some mechanism for a 401k to be divided, and part of the 401k rolled over into a new retirement vehicle for one spouse, and the remainder to the other spouse.
Put simply, it happens so often, there has to be a way to roll these things over as part of a divorce settlement such that there are no penalties, nor taxes at the time of settlement. Taxes would then be paid when the divorced couple take their withdrawals years later...typically when their respective tax situations make it less of an issue.
UPDATE: Again, talk to a legit accountant about QDRO, and see the link below.
The article below clearly states that one of the exceptions for the withdrawal penalty is a divorce.
So, with a QRDO, you save the 10% penalty.
As for taxes, since the QRDO will be a document showing a distribution from her qualifying retirement account to YOU as the payee, you need simply ROLL that money over into an IRA and avoid paying taxes on it at this time (that's me speaking, but I am not a CPA...but a CPA should tell you the same thing).
However, if you want to SPEND the money now, then you have to pay taxes on it first. The taxes will then be YOUR responsibility, not her's, as it is YOU that is deciding to spend YOUR money now...money that was not yet taxed. (again, not a CPA, but that seems fair and legit to me).
I did quite a bit of research on QRDO. A QRDO is the divorce settlement document that is used as part of the withdrawal. If spouse A has a 401k worth $20,000, then a QRDO is drafted that gives spouse B a $10,000 withdrawal from that 401k account. Spouse B gets that $10,000 check as part of the settlement, and if they don't want to pay taxes on it they need simply roll it over into a qualifying retirement account (seems to me). That leaves $10,000 in the account, that the owner, spouse A, can do whatever they want with, but I assume most just keep the account active as long as employed by the company running the 401k.
Other's above are saying that you shouldn't be liable the taxes, that she should, but that simply doesn't make sense to me. Yes, it was her 401k, but the assets are shared marital assets...that is why you are getting some of the 401k balance in the settlement. Whether you choose to cash out or roll over the money you get is up to you, and it's your money. You will pay the taxes on your money, now, or later, as will she on her's.
TJR
Last edited by a moderator:
Les
Well-Known Member
Then at the very least, she should pay 1/2 the taxes.
Thomas Rogers
Well-Known Member
Les said:
Assuming they split the 401k down the middle, then YES, she will pay 1/2 the taxes...but specifically, she will pay those taxes when she takes withdrawals on or cashes out HER 1/2 of the 401k....the 1/2 that remains in her account after the QDRO.
Coastie is responsible for the taxes on his portion of the settlement, she on hers. If NEITHER cash out the 401k anytime soon (because, as I suggested, Coastie could roll his settlement portion into an IRA), then both delay the taxes until they begin to withdraw.
Seems understandable and equitable to me.
TJR
Assuming they split the 401k down the middle, then YES, she will pay 1/2 the taxes...but specifically, she will pay those taxes when she takes withdrawals on or cashes out HER 1/2 of the 401k....the 1/2 that remains in her account after the QDRO.
Coastie is responsible for the taxes on his portion of the settlement, she on hers. If NEITHER cash out the 401k anytime soon (because, as I suggested, Coastie could roll his settlement portion into an IRA), then both delay the taxes until they begin to withdraw.
Seems understandable and equitable to me.
TJR
Coastie's post doesn't say so. She owes him $28,000. This could be because of the house, CC debt she owes, etc. If she is just raiding her 401(k) because it is money she has, the he should not pay ANY taxes on it what so ever.
If it is a 401(k) being divided, then I agree. If that isn't the case, then he should not pay any taxes at all.
Tom
TJR,
CoastieJoe ask what the penalty would be if he took 7000K in cash, and that would be 10% as well as they would deduct 20% for taxes. So he would have to take out about $10K in cash to get $7K in cash.
Yes, the are not taxes or penalty to transfer one 401K to another eligible 401K or TSP type plan, however you do need check if the plans are compatible and funds are transferable.
The main point is not to take a check or any form of payment and then assume you can just transfer the money to another retirement/pension plan...That exchange should be done by the different plans so that you never are the receipient of any funds or even a check or you will probably get stuck paying taxes and a penalty.
...Rich
CoastieJoe ask what the penalty would be if he took 7000K in cash, and that would be 10% as well as they would deduct 20% for taxes. So he would have to take out about $10K in cash to get $7K in cash.
Yes, the are not taxes or penalty to transfer one 401K to another eligible 401K or TSP type plan, however you do need check if the plans are compatible and funds are transferable.
The main point is not to take a check or any form of payment and then assume you can just transfer the money to another retirement/pension plan...That exchange should be done by the different plans so that you never are the receipient of any funds or even a check or you will probably get stuck paying taxes and a penalty.
...Rich
Thomas Rogers
Well-Known Member
Richard L,
I gotcha.
But there is one thing that hasn't been discussed at all.
Most 401k programs provide the borrower to take a LOAN against their 401k. Coastie should see if his TSP supports that.
If it does, the chain of events are:
1) His wife and tax attorney fill out a QRDO to provide to Coastie the $28k he is owed.
2) Coastie rolls that over into his TSP (no tax, no penalty at this time).
3) *IF* the TSP allows, Coastie takes out a $7k loan. If the TSP is like a 401k, then loans are allowed, and you pay back directly through your payroll, each pay period, and in the process pay the account back interest. The interest rate is the prime rate at the time the loan was taken out.
In this way, if the loan is allowed, Coastie gets cash in hands, pays off debt, and pays himself rather than his creditors the interest on the loan.
UPDATE: I just googled, and YES, TSP's allow a loan, just like a 401k, with the same terms (pay yourself back interest, payroll deduction, etc).
So, unless Coastie thinks his TSP performance over the loan will beat his current loan interest rate(s), there's not much reason NOT to take the loan.
TJR
I gotcha.
But there is one thing that hasn't been discussed at all.
Most 401k programs provide the borrower to take a LOAN against their 401k. Coastie should see if his TSP supports that.
If it does, the chain of events are:
1) His wife and tax attorney fill out a QRDO to provide to Coastie the $28k he is owed.
2) Coastie rolls that over into his TSP (no tax, no penalty at this time).
3) *IF* the TSP allows, Coastie takes out a $7k loan. If the TSP is like a 401k, then loans are allowed, and you pay back directly through your payroll, each pay period, and in the process pay the account back interest. The interest rate is the prime rate at the time the loan was taken out.
In this way, if the loan is allowed, Coastie gets cash in hands, pays off debt, and pays himself rather than his creditors the interest on the loan.
UPDATE: I just googled, and YES, TSP's allow a loan, just like a 401k, with the same terms (pay yourself back interest, payroll deduction, etc).
So, unless Coastie thinks his TSP performance over the loan will beat his current loan interest rate(s), there's not much reason NOT to take the loan.
TJR
Last edited by a moderator:
Bill Barber
Well-Known Member
get a cashiers ck for the full amt, let her suffer the rest.JMO
Thomas Rogers
Well-Known Member
Caymen may be onto something when he said:
So, Coastie, which is it?
Is she:
a) paying you $28,000 total for the settlement, and coming up with that money, in part or in whole, by cashing out part of her 401k?
or
b) Is she splitting the 401k and giving you $28,000 of it (which might be the case if it were worth $56k and considered a joint marital asset)?
Depending on your answer there is different advice.
TJR
So, Coastie, which is it?
Is she:
a) paying you $28,000 total for the settlement, and coming up with that money, in part or in whole, by cashing out part of her 401k?
or
b) Is she splitting the 401k and giving you $28,000 of it (which might be the case if it were worth $56k and considered a joint marital asset)?
Depending on your answer there is different advice.
TJR
Kevin Palmer
Well-Known Member
The money is her way to pay me the equity of the house that I am walking away from.
And as noted, TSP's will allow a loan and it is a pretty good deal actually. I literally pay myself back plus 4% interest and the 4% goes to the account as well.
I don't NEED the money, just thought it might be a good opportunity to kill some bills kind of thing.
And as noted, TSP's will allow a loan and it is a pretty good deal actually. I literally pay myself back plus 4% interest and the 4% goes to the account as well.
I don't NEED the money, just thought it might be a good opportunity to kill some bills kind of thing.
Thomas Rogers
Well-Known Member
Coastie,
Thanks. That helps.
Is the 28K that she owes you on the house only, or is the $28k her entire settlement to you that includes the house buy-out, AND other things?
If that $28k is to cover just the house, then she will have to pay penalty and taxes as others have said as she is liquidating HER funds to pay you.
Somewhere in this whole thing you are owed a portion of her 401k...not because she is using it to buy you out of the house, but because it is a joint marital asset which you are entitled.
How does THAT figure into the equation?
TJR
Thanks. That helps.
Is the 28K that she owes you on the house only, or is the $28k her entire settlement to you that includes the house buy-out, AND other things?
If that $28k is to cover just the house, then she will have to pay penalty and taxes as others have said as she is liquidating HER funds to pay you.
Somewhere in this whole thing you are owed a portion of her 401k...not because she is using it to buy you out of the house, but because it is a joint marital asset which you are entitled.
How does THAT figure into the equation?
TJR
If she is paying you for the house you are walking away from, then you do not need to worry about any penalties or taxes. This is not income. This is a payment.
Tom
Tom
