401k distributions from divorce

[nfieldr]

Hi, I have a client who was divorced in 2008. His divorce decree required that he cash out two 401k plans. He was required to give his ex 50% of one distribution and 100% of the other.

Although my client received 1099-R's from both plans, it doesn't seem right that he should have to pay tax on the money that his ex received. I thought about reporting the money paid to the ex-wife as alimony, but that is not an option. How should I report this on his return? Thanks in advance.

[taxmom34]

i think all he can do is get out of penalties.

[Possi]

Qualified Domestic Relations Order

I am in the midst of my divorce after 30 years of marriage, and our 401K will need to be split. My lawyer said it will be done by using a QDRO so that we are not hit with those taxes.

Here is a quote from a website I just found.

"It is always a good idea to ask your 401k administrator if there is a model QDRO form incase of any situations like these that arise. The retirement assets distributed from your 401k plan are NOT subject to the 10% early withdrawal penalty fee if it is established and carried out properly. However, if the QDRO is NOT established and carried out properly, you will be subject to the 10% early withdrawal penalty. Beware, you do not want to be taxed on money that is no longer yours!"

http://www.research401k.com/divorce-401k.html

Maybe it was done properly and the 1099 was issued improperly.... OR maybe it was done improperly and the 1099 is correct. I don't know.

I do know that my lawyer will use the QDRO so I won't have any surprises when it is all said and done.

[Roberts]

Taxes

This should have been negotiated during the divorce. A QDRO can do many things but once the money is withdrawn from the 401-k, ownership of the tax bill is determined. It is very difficult to make retro-active changes and would require the attorney's being involved to determine that the QDRO wasn't written or executed properly.

Technically, when the settlements were being negotiated, the tax bill should have been included in the net settlement amounts. This is why tax and financial professionals need to be included in many divorce settlements.

If the divorce decree said he was to cash out the 401-k, the tax bill is his.
If the divorce decree said the client should transfer the money to his ex-wife and she can make a withdrawl if they want, it is the ex-spouses tax bill.

edit: all 401-k administrators have model QDRO forms and I've yet to meet an administrator that didn't require a QDRO. IRA's can be moved without a QDRO most times but 401-k's generally require them.

[Possi]

yup

That's what my lawyer said alright! So, I pray I don't have any surprises when the dust settles. He is a great lawyer, thank goodness.

[Roberts]

That's what my lawyer said alright! So, I pray I don't have any surprises when the dust settles. He is a great lawyer, thank goodness.

still, you need to watch them closely. I've had client who shifted assets within the 401-k to their ex-wife's IRA via a QDRO and THEN the ex-wife wanted to make a distribution as stated in the divorce agreement. BAM - 10% penalty applies because the QDRO wasn't written properly or people didn't understand it.

ALSO - lawyers tend to hate QDROs and other attorneys know it. I had a client with 6 different small 401-k's. Instead of moving 100% of the assets in one or two 401-k's, the attorney demanded 50% of each account be transferred separately. The attorney knew the wife didn't have the funds to pay in advance for all that paperwork and he gambled she would just forget about it. It worked. His client ended up keeping all of his 401-k assets.

[Davc]

He is a great lawyer, thank goodness.

How much extra do you have to pay for the medium?

[Edsel]

Rollover

For Pete's sake, why didn't he "rollover" half of his IRA to a new IRA belonging to her?

Then she had the option of either cashing it out (and paying the tax) or leaving it alone.

If this is done to a spouse, is the "G" code unavailable?

[Possi]

Huh?

How much extra do you have to pay for the medium?

This went over my head.... I hate lawyers. I happened to get one who hates opposing lawyers.

I'm paying plenty....

[Burke]

It is my understanding that when, in the process of divorce, a QDRO is done, there is no taxable event realized by either party if qualifed pension funds are rolled over into an IRA or an existing qualified retirement plan for the ex-spouse. However, each would be subject to taxable distributions and/or penalties under normal rules if any withdrawals are taken after that is accomplished. See Pub 504. (Does not apply to IRA's)

[Roberts]

It is my understanding that when, in the process of divorce, a QDRO is done, there is no taxable event realized by either party if qualifed pension funds are rolled over into an IRA or an existing qualified retirement plan for the ex-spouse. However, each would be subject to taxable distributions and/or penalties under normal rules if any withdrawals are taken after that is accomplished. See Pub 504. (Does not apply to IRA's)

You can get the penalty waiver for IRAs also. I've done it many times.

[Roberts]

As was said, it depends on how the divorce decree is written. If in the negotiations it was mandated that he pay the taxes instead of her (because maybe she makes 10x what he does), that's what you have to go with.

[luke]

been there done that

Possi - been there done that - SORRY to hear about your 30 yr marriage ending. Both of my previous marriages were only 6 - 7 years (and luckily or unluckily I didnt have 401-ks to worry about etc)
They WERE still a PIA!

[Possi]

LONG time

Possi - been there done that - SORRY to hear about your 30 yr marriage ending. Both of my previous marriages were only 6 - 7 years (and luckily or unluckily I didnt have 401-ks to worry about etc)
They WERE still a PIA!

I know, it only takes a second to get married and forever to settle a divorce.

I could have murdered someone and been free by now!

Oh well, onward and upward. At least I'm being treated fairly, so far...

[Davc]

This went over my head.... I hate lawyers. I happened to get one who hates opposing lawyers.

I'm paying plenty....

Here's a hint. The only good lawyer is a _________ lawyer. The reason a live one is cheaper is because you don't have to pay a medium to talk to them.