Retirement Fund and Divorce

[Bob B.]

I am getting divorced. I have a retirement fund, she does not. Obviously, she will get part of my retirement fund when the divorce is made final. My question - I know that if I were to take money out of my retirement fund, there would be penalties and taxes due. What about taking money out as a result of a divorce? Is there then the same penalties and taxes? TIA.

[james.hendrickson]

Bob - straight up. I don't have a good answer to your question, but I wanted to take a minute to respond to your note.

Here are a couple of thoughts.

First, can you negotiate a split that doesn't involve your retirement?

Second, sometimes when people get divorced, their thinking isn't really clear. Have you raised the issue with your attorney? Do you have an attorney? If not, you should get one ASAP.

[Bob B.]

Yes I have an attorney.

I have raised the issue with my attorney. But not the penalties/taxes issue, just that she would be due at least part of my retirement fund.

The way I have it figured, if she gets the house, and all the assets associated with the the house, to make the split equal, I will keep 70% of my retirement fund, and she will get 30%.

So, basically my question is, will part of that 30% get eaten up by penalties and taxes? And will I have to contribute even more to make up the balance?

[kork13]

I'm not an expert by any means (consult a CPA or similar), but I'm pretty sure there are provisions in place for just this specific situation. As long as you file the paperwork properly, it's treated as a simple transfer between qualified accounts, and is not subject to taxes or penalties.

[disneysteve]

From an article at cnbc.com: "While divorce is one of the few times that 401(k) funds can be accessed before age 59½ without incurring an early withdrawal penalty of 10 percent, the recipient would pay ordinary income taxes on the money."

So no penalty but the money is taxed.

[disneysteve]

In addition to your attorney, you should also be working with a good CPA for all of these arrangements.

[Bob B.]

Thanks. It's a 403(b). I assume that doesn't make a difference.

[kork13]

From an article at cnbc.com: "While divorce is one of the few times that 401(k) funds can be accessed before age 59½ without incurring an early withdrawal penalty of 10 percent, the recipient would pay ordinary income taxes on the money."

So no penalty but the money is taxed.

My understanding is that's only the case if the recipient spouse receives it in cash -- if it's transferred to another qualified account (401k/403b/IRA/etc.), no taxes or penalties are involved (unless it goes from traditional to Roth -- then it'll be taxed per normal).

[disneysteve]

My understanding is that's only the case if the recipient spouse receives it in cash -- if it's transferred to another qualified account (401k/403b/IRA/etc.), no taxes or penalties are involved (unless it goes from traditional to Roth -- then it'll be taxed per normal).

Gotcha. I only did a quick search. Didn’t delve into the details.

[Bob B.]

I assume she would roll it in to a Roth IRA. But if she didn't - if she took it in cash - the taxes would appear to be on her, not me.

[kork13]

I assume she would roll it in to a Roth IRA. But if she didn't - if she took it in cash - the taxes would appear to be on her, not me.

That's my understanding, in both cases. If she chooses to roll it from your traditional 403b to a Roth IRA, she'd owe taxes on it (unless you've got it in a Roth 403b? Do those exist?). If she took it in cash, she'd owe taxes. Regardless, the taxes on it shouldn't be a factor for you. It's on her, and totally dependent on what she chooses to do with it. (but again...better to QC that with an expert)

[bjl584]

Sorry to hear about your divorce.
No penalty as others have stated.
But, make sure you have a good attorney crossing all your T's and dotting all your I's.

[james.hendrickson]

Sorry to hear about your divorce.
No penalty as others have stated.
But, make sure you have a good attorney crossing all your T's and dotting all your I's.

This never hurts, divorce can be super expensive and you'll need good objective advice.

[Bob B.]

Thanks for the replies, and answers. I appreciate it.

[Like2Plan]

I think it is called a Qualified domestic relations order (QDRO) for you to to separate your retirement assets.

https://en.m.wikipedia.org/wiki/Qualified_domestic_relations_order

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-qdro-qualified-domestic-relations-order