Cashing out 401K to pay STBX

[intothewind]

If you are saying that a cash settlement is part of the deal, and you can only get that cash by withdrawing funds from your retirement plan, then you are on the hook for the 10% penalty off the top and should have taxes withheld for the withdrawal amount so you don't have to write a big check at tax time next year.

Therefore, generally, if you agree to pay her $10,000, you'll have to withdraw, for example, $12,500 to cover your 10% penalty and 15% in taxes. So making the agreement this way loses you 25% of your money off the top. Not a smart strategy.

If you get her to set up her own retirement account, you would be able to transfer $10,000 in this example, over to her account. Period. End of story. Then if she wanted to withdraw it...you guessed it, she would be liable for the penalty and withholding. This should be well known to her lawyer and parents so you are not likely to slip it past the goalkeeper, unless she is actually looking for a retirement nest egg from you.

She's having a fit about having to setup her own IRA. It's supposed to be a cash settlement. This deal is in lieu of monthly maintenance. I was staring down the barrel of potential life-time support payments, so if I have to pay some additional tax next year, so be it. Way better than paying her the rest of my working life.

[coscrewed]

You really need to consult a financial advisor. I am not one, nor do I portray one on a sitcom, but.....

Divorce is one of the only times you can transfer money out of a 401K without the 10% off the top IRS penalty, as long as it is going into an ex-spouse's account, AND is being done via a QDRO signed by a judge. I repeat, if you do not execute the transfer via a signed QDRO, she will pay the 10% penalty *and* be taxed on the full amount.

For example, if she expects $25K, you can give her $25K by transferring it into her non-IRA account, but ONLY after a QDRO order has been signed by the judge. You then give the QDRO to the 401K manager and they execute the transfer. For an IRA, you just transfer the money AFTER a judge as decided how much she gets and issues a court order.

The recipient *will* be required to pay taxes as income on the amount received, but as long as the rules are followed, there is no penalty. If the money goes into an IRA owned by the ex, there is no penalty and no taxes.

The recipient can negotiate to have some of the money go into an IRA and some go into a non-IRA, and taxes will only be paid on the amount that goes into the non-IRA.

If you are talking about a significant amount of money, you really want to get a professional involved.

[anonymous guest]

Don't forget to factor in the penalty and the taxes. For instance, if she expects $50K you will have to take out $50K plus the penalty, plus the taxes you will have to pay.

I am sure she wants the money "net" not "gross." So make sure you specify to avoid any confusion.

[BubbaGumpShrimp]

She's having a fit about having to setup her own IRA. It's supposed to be a cash settlement. This deal is in lieu of monthly maintenance. I was staring down the barrel of potential life-time support payments, so if I have to pay some additional tax next year, so be it. Way better than paying her the rest of my working life.

If I were in your shoes...I'd cash it out...pay the penalty...and move on.

Don't forget to factor in the penalty and the taxes. For instance, if she expects $50K you will have to take out $50K plus the penalty, plus the taxes you will have to pay.

I am sure she wants the money "net" not "gross." So make sure you specify to avoid any confusion.

Yup. However, I wouldn't be surprised if she didn't think to specify that. If that's the case, I'd pull out the gross amount (as she wasn't bright enough to specify net) and say "tough $h1t" when it gets hit with a penalty.

We're talking about a female that's just gotta have cash. I HIGHLY doubt that she even knows the difference between net and gross.

[Trevor]

Sorry, early withdrawals get hit with the penalty straight away. It's your account, your tax/penalty liability for that early withdrawal. It comes off the top.

[coparentchamp]

Make sure you do it gross...and get it out of your account prior to any withdrawals. What she does with it at that point - is on her head and her tax return. She must open an IRA in her name to recieve it - otherwise it's you that gets whalloped with heavy duty taxes. Insist on it.

[anonymous guest]

I don't think you will have much luck saying "tough < edited >."
If your decree says to pay her $25K, then you gotta pay her $25K, even if you have to take out $35K to pay taxes and penalty.
Now, if you are talking chump change, then it probably doesn't matter.
You could always write in the decree that you will take out $25K but she will receive the net payout after taxes and penalties if she doesn't want to roll it into an IRA (where she could immediately take it out penalty free but still have to pay income tax on it). I don't think you will be successful, unless her lawyer is real dumb.