1. Guest,
    If you need help getting to know Xenforo, please see our guide here. If you have feedback or questions, please post those here.
    Dismiss Notice

Any tax code gurus out there?

Discussion in 'After Hours Lounge (Off Topic)' started by Michael_K_Sr, Jan 22, 2006.

  1. Michael_K_Sr

    Michael_K_Sr Well-Known Member

    Aug 14, 2005
    Likes Received:
    Chicago 'burbs
    Real Name:
    I have a friend that is going through a divorce and it's supposed to be finalized next month. Part of the settlement is that she has to give 50% of her 401K proceeds to her soon to be ex-husband. Now I know that early withdrawls on a 401K result in taxes being paid on the withdrawn amount as well as a 10% penalty. Does the tax code provide any relief from this in the event of a divorce? For instance, would the ex-husband be responsible for the taxes and penalty?
  2. CameronJ

    CameronJ Well-Known Member

    Feb 28, 2002
    Likes Received:
    Nope - she would not be responsible. The assets in the 401(k) plan actually get transferred into an account for the ex-spouse, who then may be able to withdraw the money. If the ex-spouse is able to withdraw the money, he is then liable for penalties and taxes (i.e. the withdrawal gets reported under his SS#, not the ex-husband's).

    It's important to note that many plans would not allow him to withdraw the money unless she has a "qualifying event" (retirement, etc.), although plans now are commonly including the ability to make in-service withdrawals.

    Edited to add:
    Make sure that the assets are transferred using a Qualified Domestic Relations Order ("QDRO"), and that the divorce settlement stipulates that she is responsible for taxes and penalties. I have seen divorce settlements that require that the employee withdraw the amount and then give it to the ex-spouse, which is then taxable to the employee. Usually this happens when the employee has a moron for an attorney who doesn't understand the implications of this type of transaction.

Share This Page