Any tax code gurus out there? (1 Viewer)

[Michael_K_Sr]

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 Now I know that early withdrawls on a 401K result in taxes being paid on the withdrawn amount as well as a 10% penalty.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?

 

[CameronJ]

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.