Divorce issue

[kskaggs]

I have searched multiple resources trying to find some clarification and can't find any solid ground.

Issue: Wife has a QDRO drawn up to get $280,000 of husbands 401k. Wife is required to pay husband $100,000 per divorce decree after she receives this money. Husband will pay the income taxes the wife incurs from this transaction.

The issue that has me concerned is the husband (who is in the highest tax bracket) has basically received an early 401k distribution, penalty free at the wife's tax bracket (which may be lower). My gut feeling is many flags will be raised.

I would appreciate any input or pointing me in the right direction to some to give proper guidance to this couple. I would like to be able to tell them this is exactly how it works, but I don't have a good feeling about it.

Thanks

[ChEAr$]

even without doing the numbers, sounds like each end up with about a third; husband, exwife and the IRS.

shouldn't everybody (and the lawyer? ) be happy?

[Burke]

I'm like you -- it's a sham to give the hubby $100K at the lower tax bracket. I am assuming it will be a tax-free transfer to her, then she makes a withdrawal to give back to him. And if they are not married when this occurs, there are gift-tax issues. What kind of bracket is he in? Hers is going to be up there itself unless she has zilch for other income, and she will be subject to early withdrawal penalty if she is under 59 1/2. But, it isn't likely to raise any flags on the surface unless one or the other were audited and this particular transaction was investigated. Who cooked up this scheme?

[appelman]

If this is all spelled out in the QDRO...

I wouldn't think that you would have any concern or input. It is apparently a done deal.

[Gary2]

All I know about the substance over form doctrine is that it's impressive jargon, but why exactly wouldn't it apply?

[WhiteOleander]

Wifey better get the tax he agreed to pay before she gives him his share. If he'll cheat anyone elae, he'll cheat her.

[Jesse]

Just thinking out loud....

If QDRO done properly there will not be a 10% penalty and if she doesn't need all of the money she can roll $180,000, or any portion of it into another retirement plan, but be very sure what is needed is taken direct through the QDRO and not after it rolls into another retirement plan.

Maybe take a look at the settlement document and get answers as to why are they doing it this way. Is it tax avoidance? Does she have no cash or credit and this is a way to pay for a property settlement - maybe to buy out a share of the home? If so would it still be considered tax avoidance?

If not spelled out in a document she is free to do whatever she wants with the money so if she gives it to her ex a gift tax return would be necessary. Although that's a lot of trust in a verbal agreement.

[ChEAr$]

facial "ticks"? grin

you mean the kind you get out in Texas hill country?
or maybe the nervous type? (tic)

I've had one, but not the other.
They say Bourbon whisky is good for .. which one? maybe both.

[WhiteOleander]

facial "ticks"? grin

you mean the kind you get out in Texas hill country?
or maybe the nervous type? (tic)

I've had one, but not the other.
They say Bourbon whisky is good for .. which one? maybe both.

Well, in hopes to indemnify myself against all claims, I will choose both types of ticks. And actually, I believe Bourbon will probably alleviate them both. But again, please see your physician.

[kskaggs]

Thanks for the input

Looks to me like all the I's are dotted and T's are crossed.

The divorce decree states both that wife gives the money to the husband, and the husband pays the tax difference for the wife.

Thanks for everyone's input on this!!

[New York Enrolled Agent]

Looks to me like all the I's are dotted and T's are crossed.

The divorce decree states both that wife gives the money to the husband, and the husband pays the tax difference for the wife.

Just because the i's are dotted and the t's crossed, it still doesn't mean this is bona fide transaction. I think you have overlooked Gary2's comment - this appears to be a step transaction with the purpose of H getting money out of the 401K without the 10% penalty. The facts in your scenario do not appear to pass the smell test. Why shouldn't the wife simply get a $180K in the QDRO?

The DOL has issued an advisory opinion 99-13A which basically tells the plan administrator to make sure the QDRO is not a sham or questionable in nature.

Lastly, I think you are on dangerous ground giving guidance to this couple . There may well be a conflict of interest here between H &W - there usually is when a couple is divorcing.

[DaveO]

I just saw one of these deals for the first time. It seems a way around the 10% penalty for the husband. In most cases I think it's so the attorney is sure they will be paid.