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

[Thomas Rogers]

Caymen,



Agreed, if SHE is talking out 28k from her 401k for the soul purpose of buying Coastie out of the house, then his tax situation doesn't change (not income), but SHE will have to pay tax and penalties against the 401k distribution, all because SHE is taking HER retirement and paying HIM with it.



Still, I'd like to understand the specifics of the $28k, and if it includes any portion of the 401k that Coastie is due as part of the split of that marital asset.



TJR

 

[Kevin Palmer]

TJR,

Correct, the marital asset is worth 60 grand to the positive right now. She is giving me 30 grand to walk away form it.



And there is no taxes penalty for me to take the money if I slide it into my TSP. Only if I want some in the form of cash. And in that case, the 10% is waived as it is part of a settlement. However, the tax will be paid by me as it is in theory coming from my TSP at that point.



Not a great deal, but at least it is money.

 

[Les]

the tax will be paid by me as it is in theory coming from my TSP at that point.

Do not place it into your TSP. I know it is more complicated than it appears, but, you are dividing marital assets. She owes you $30,000 due to your agreement. Where the money originates should not be your concern, only that you receive what is due you. Now, you may be willing to accept less money in order to work with her or for what-ever reasons, but losing approx. 20% of what is due you is not necessary.

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.

As Caymen and TJR said above, this is settlement money.

 

[Tom Schindler]

Like Les is saying. There is NO REASON to place it in your TSP. If that is part of the settlement that you MUST place it in the TSP, then you are bound to the ruling. If you feel compelled to place it in your TSP, then instead of that, open an IRA and place the amount you want into it and keep the rest for yourself.



I just need to understand why you fell the need to place it in your TSP?



Remember, no favors for the ex-wife. She isn't your friend any more.





Tom

 

[Jim parnell]

I think someone mentioned borrowing from your TSP and you kinda liked the idea, so, to avoid state and federal income tax & penalties, why not have all the $$ to your TSP, then borrow what you need from your TSP, and pay it back over time IF this will make it easier on your wallet as well. Avoiding the state and federal tax/penalties is good, as if you take a portion or all of the settelement in cash, then whatever funds received in cash will kick you into a higher tax bracket for the year as it will be considered current year income. borrowing from your TSP will not be considered income, and you pay yourself back which is a good thing as well. This may help your ex as well if you want to help her out, but your 1st consideration should be you unless it would create an undue hardship on her, which could end up on the kids

 

[Thomas Rogers]

I only mentioned placing the money in the TSP to avoid taxes.



I still think there is a missing piece here. I've re-read Coastie's responses several time.



However, it seems to me that there should be several figures that all come together to define the total settlement that Coastie is receiving.



I understand that Coastie's wife is buying him out of the house. That means for that, Coastie get $H (for house).



Also, I assume that his wife's 401k, or at least part of it, was a joint marital asset that now needs to be divided. Let's call Coastie's portion of that 401k $K (for 401k).



Then, there may be other miscellaneous items that his wife is having to pay him for; say 1/2 the total of the fair-market-value of any other jointly owned assets (cars, personal belongs, household items, etc) that his wife wishes to keep. Let's call that figure $M (M for Misc).



Now, there may be some assets that are joint and in Coastie's name, and/or that Coastie wants to keep. Those have to be accounted for as well as 1/2 of those are his wife's. Let's call that amount $C (C for Coastie's).



So, in this simple approach, the settlement that Coastie gets from his wife is:



Total Settlement = ($H + $M - $C) + $K



I wrote the equation this way because there are two parts to the settlement; that which is liquid, non-taxed monies, and that which is a 401k withdrawal.



Now, if this is all correct, then $H and $M are liquid, non-taxable monies. These are what his wife owes on the house and other items she is keeping. Furtheremore, if the amount Coastie owes his wife ($C) is less than the total of $H + $M, then it's a net positive, and she owes him a total, and it sounds like that total is $28k, and it sounds like she has to (or is choosing to) take money out of her 401k to cover that amount ($H + $M - $C).



As for $K, that is the amount that in my opinion should be rolled over into the TSP or an IRA to avoid taxes.



The question to Coastie is:



Do you understand the rather simple equation I present, and how part of the total settlement is liquid, non-taxed, and the other less-liquid retirement funds?



If you understand where I am going, then my next question is:



What makes up the $28k you mention? Is the $28k = $H + $M - $C?



Or, is the $28k the value of $K? If it isn't, then is there a $K greater than 0? If not, why not?



TJR

 

[Johnny O]

If I'm reading this correctly, and I could be wrong....

You get $28k as a divorce settlement. If you take cash, she has to pay a penalty on the 401k withdrawl. If you agree to a transfer to your retirement funds, she doesn't.

Obviously your ex-wife would prefer this.

Although $28k cash-in-hand would be handy, an additional infusion of $28k into your own retirement funds might not be a bad deal for you either, especially if as you said, you don't really need the money.

Depends on if you feel like doing the ex a favor and if you'd rather have more money later instead of now.

 

[Richard L]

I agree with Caymen an others.



If she is paying you off for your portion of the equity in your home, then how she pays is her choice. If she wants to pay a 20% in taxes and a 10% penalty, that is here choice. Her other option is to get a $30k loan, to pay you, or she can sell the house and give you half of the selling price.



If the equity is the increased value of the house, then you will have to pay taxes on the captial gains. If the equity is only based on the amount paid on the loan, then there is no capital gain and should not have to pay taxes on your protion of the money.



I would think your attorney would be able to tell you what the tax ramifications are...assuming you hired an attorney to handle your side of the divorce?



...Rich

 

[Kevin Palmer]

Ok,

Lets try it this way...



Presently, she does NOT have the money she owes me in liquid capital, aka cash. She has LOTS of money in her 401k and it is hers alone, not mine nor do I have a connection to it. Mainly because we agreed to NOT affect the others retirement money.



So she is giving me the 28 grand from her 401k as that is the only place she has that much money readily available.



Yes, no matter how you look at it, this will cost me. Be it if I turn it into cash right now or later on when I retire.



I have since figured out that she can easily get a loan for the entire debt of the house and what she owes me. So that is the direction I am pushing for at this time.



That said, I am to the point of not wanting to wait much longer. I would take a penalty to be done at this point.

 

[Les]

That said, I am to the point of not wanting to wait much longer. I would take a penalty to be done at this point.

This is how they wear you down.

Yes, no matter how you look at it, this will cost me.

Only if you let it, this is her problem, not yours, with regards to the penalties.

I have since figured out that she can easily get a loan for the entire debt of the house and what she owes me. So that is the direction I am pushing for at this time

This is the way to go...

 

[Thomas Rogers]

Coastie,



I'm not sure about the "so that is the direction I am pushing her", as it seems coming up with the money for the settlement (borrow, cash out 401k, etc) is up to her, as long as she provides you the funds when ordered by the court.



You still haven't discussed one piece of important information. Regardless of HOW she pays you all that she owes you, I have to ask; are you owed, or due any portion of her 401k in the settlement?



If you are owed some of the 401k (by the fact that portions of it are a joint marital asset), then THAT portion of the settlement, when received, should probably be directed toward your own retirement vehicle; your TSP or an IRA, in order to avoid the tax issues.



That portion is what I called $K above. The REST of the settlement, do with what you wish, tax and penalty free, as that is your money and not income.



Regards,

TJR

 

[Kevin Palmer]

TJR, no, I am not owed any part of her 401k. It is simply a pool that she had money in that she could access to give to me for she owes me on the house.

 

[Thomas Rogers]

CoastieJoe,



If it is not too personal, might I ask, why are you not owed any part of her 401k?



The main reason you wouldn't be is because it was contributed to entirely before you were married.



However, if she contributed ANY amounts to the 401k while you were married, then you are rightfully entitled to 1/2 those contributions + earnings (assuming there are any at this point...argh, bad economy).



Lastly, if the money that you are getting from the settlement is NOT in whole, or in part portions of her 401k retirement that you are owed, then I don't understand why you are considering rolling any of it over into your TSP or IRA.



The issue here is that she may be choosing to pay you via her 401k, but that is her choice. The monies you are getting once given to you are not retirement monies. You needn't put them in a retirement vehicle to avoid taxes, and you needn't worry yourself about penalties or taxes that she might bear by her actions.



TJR

 

[Les]

However, if she contributed ANY amounts to the 401k while you were married, then you are rightfully entitled to 1/2 those contributions + earnings (assuming there are any at this point...argh, bad economy).

Presently, she does NOT have the money she owes me in liquid capital, aka cash. She has LOTS of money in her 401k and it is hers alone, not mine nor do I have a connection to it. Mainly because we agreed to NOT affect the others retirement money.

 

[Kevin Palmer]

TJR, just an agreement we have to not touch each others retirement account. Which is a good deal for me as I have one 23 year retirement from the military and I am working on my second one now that is a Federal TSP.



Rolling it into my TSP as I don't NEED the cash. Yes, certainly could be useful, but not critical. Also, by putting it into my TSP it will grow I would think due to the down economy. I plan on retiring in 12 years from now.



If you know of a way I can take the money and NOT roll it into my TSP and NOT pay basically 30% in the form of tax, (based on my income tax bracket) I would be interested in your views...

 

[Bob McDonald]

If your TDSP or 401 don't allow additional cash deposits, you could probably open a new IRA account for it. Any tax consequences would be dependent on max amount allowed to retirement instruments.

 

[Kevin Palmer]

Unlimited deposits and unlimited amounts can be deposited when it comes from another 401k/TSP or is NOT already taxed and part of a settlement.



Checked on that one early on...



Thanks though..

 

[Gavin Allan]

If you know of a way I can take the money and NOT roll it into my TSP and NOT pay basically 30% in the form of tax, (based on my income tax bracket) I would be interested in your views...

You don't pay tax on a divorce settlement. It's money due you, not income. You can do whatever you want with the money.



If she withdrawls money from her 401, SHE is responsible for paying the taxes and penalties. She is free to get the money in another manner, i.e. personal loan, savings, cash on hand, sell some assets, home equity loan, etc. That is HER problem, not yours. She just needs to pay the amount due as listed in the settlement agreement.

 

[Thomas Rogers]

Coastie,



What Gavin said!



Divorce settlement proceedes are NOT taxable income, with a couple of possible exceptions (check with a tax attorney) for some of the funds:



1) Proceeds from a home sale, or home buy-out, as you could be liable capital gains tax if the home in question rised significantly in market value between purchase and buy-out.



2) Proceeds from a retirement fund.



Since you said you each agreed to not touch each other's retirement funds, then type 2 above doesn't apply to you.



That leaves the portion of your settlement that is coming from the home buyout. If that portion of the settlement includes an appreciable rise in value of the home, than that could require capital gains taxes to be paid. An appraisal will be required, if not already done. Capital gains are not always applicable in a home sale, or in this case a home buyout. A tax attorney should be able to tell you more.



The way around paying the capital gains taxes on the portion of the settlement coming from the home, if they are due, is to take that portion of the settlement and put it down on a new home.



Lastly, since NONE of the funds from the settlement are coming DIRECTLY from a qualifying retirement account (thus eligible for roll-over or investment into an IRA), your investment of these funds into your TSP would essentially be in the form of "already taxed dollars"...which for a TSP is pretty unique. Check with your fund manager to see if that is allowed, and make sure that when you withdraw portions of the funds when you retire that you won't AGAIN be paying taxes on them.



Personally, I wouldn't put the money into a TSP. The money won't be liquid. There are other investment vehicles that are better for already-taxed dollars. I think putting the money in your TSP is a bad idea. A great idea for not-yet-taxed monies; a bad idea for already taxed monies.





Les,



Thanks for that last quote. Missed that part about not being owed any of the 401k monies; which is why I asked.





TJR

 

[Kevin Palmer]

I agree with you both (both posts above this one), however,,,.

The house is not going to be sold, so unless she does get a loan, the money WILL come from her TSP. Which will be tax free dollars so my only choice is to put it into my TSP or be willing to lose some money in the form of tax (no penalty, just tax).



I am working the angle of the loan deal now.



Yesterday was a rather big day as I really let her lawyer have it. Found several questionable things within the papers and what not.



Since then, it is clear she talked to my spouse as she has texted me and e-mailed me several "I'm sorry's"...



I have not replied, just not ready to yet....