Tags: Retirement | divorce | 401k | tips | avoiding | withdrawal penalties

5 Tips for Avoiding Withdrawal Penalties on Your 401(k) During a Divorce

By    |   Monday, 27 Apr 2015 11:38 AM

Your 401(k) plan becomes part of marital assets considered during a divorce. If money in the plan needs to be divided between you and your spouse, it could cost you more in tax penalties during the withdrawal.

Here are five ways you can manage your divorce settlement without tax penalties on withdrawals from your 401(k):

1. Discuss all options involving your 401(k) with the plan administrator. These accounts differ among employers and some plans may provide directions on how to deal with possible disbursements for divorce settlements.

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The plans also include certain rules and provisions regarding divorce, according to Laura Johnson, author of "Divorce Strategy: Tactics for a Civil Financial Divorce." Some plans allow distributions of a portion during a divorce, but others don't allow it until retirement.

Johnson advises researching your own plan before talking with a lawyer or financial planner to help you understand the guidelines.

2. There may be ways to use the proceeds of your 401(k) in a settlement and avoid penalties for early withdrawal, notes certified financial planner Bob Burger in his blog, Sensible Money.

Depending on state laws, you could avoid tax penalties if the money withdrawn from the account is done as part of the divorce decree under a qualified domestic relations order, known as a QDRO. A QDRO is a legal document drawn up by your attorney to comply with federal regulations to make a spouse an "alternative payee." Regulations may vary, so discuss the possibilities with a financial planner and attorney.

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3. A spouse can take money as part of a cash settlement in a divorce.
According to Legal Zoom, the arrangement must be settled at the time the plan administrator approves the QDRO, which details disbursements. This avoids a tax penalty for early withdrawal. Money taken out by the spouse still counts as income and will be taxed normally.

4. Rolling over a portion of the 401(k) plan
into the spouse's retirement plan may avoid tax penalties and also allows the ex to choose more investments to manage a retirement plan. A spouse can also arrange to leave the agreed portion in the plan and take it out when you retire.

The rollover option for the 401(k) is only available if you have left the company or you have reached age 59 and a half, according to 401khelpcenter.com.

5. Whatever portion of the plan you need to pay your spouse in a divorce, you can reduce possible taxes or tax penalties by asking the court to exclude money you put into the account before you were married. This requires accurate record keeping to show the after-marriage portion for distribution, reports The Huffington Post.

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Your 401(k) plan becomes part of marital assets considered during a divorce. If money in the plan needs to be divided between you and your spouse, it could cost you more in tax penalties during the withdrawal.
divorce, 401k, tips, avoiding, withdrawal penalties
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2015-38-27
Monday, 27 Apr 2015 11:38 AM
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