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Divorce & 401k Split/Distribution
Old 08-05-2009, 08:51 PM   #1
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Divorce & 401k Split/Distribution

My parents finalized their divorce and one of 'em asked if knew how to handle the 401k in order to defer taxes.

I think I know the answer but I'm just not completely sure due to the divorce factor.

Basically, what I assume happens is that the 401k is divided and a check must be issued and distributed to both parties to finalize the deal. So I think what must be done is that my parents need to set up a rollover IRA, have the check be made payable to the institution - Vanguard for example - that will manage the rollover and simply fund it from there with the proceeds. To me, these actions would defer taxes.

I guess my question is - the 401k is from my dad's account and has been funded with his earnings. If 1/2 is distributed to my mom's name, is there any tax liability simply due to the transfer itself since she was not the one who funded the 401k/etc.? If there is tax liability, any way to minimize it? Thanks for any help.

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Old 08-05-2009, 09:09 PM   #2
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No tax liability, they can do a rollover to her into an IRA. There is specific language that must be in the divorce decree to effect this as a tax free rollover. Is called a QDRO and the divorce lawyer should be responsible to set it up correctly. Making a mistake is bad news and could cause taxes to be due now, rather than later.


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Old 08-06-2009, 07:51 AM   #3
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The divorce decree should specifically and exactly describe what assets (including the 401k) are distributed to whom and what percentages are split. They have to do exactly what it says and not inadvertently turn this into a distribution or there will be a huge penalty plus taxes plus lose the 401k protection. There is no "oops" on this. If you get it wrong you cannot "put it back" and do it over. The lawyers for the divorce should be able to tell them EXACTLY what they need to do.

They should doublecheck whatever they are told. I know cases where the divorce lawyer described it poorly and the couple messed it up. You have to be careful with this.
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Old 08-06-2009, 07:59 AM   #4
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BTDT - your mom needs to to be sure the Qualified Domestic Relations Order (QDRO) is written correctly so that it is recognized by your dad's 401(k) administrator. It sounds simple, but all the details need to be executed correctly. If it is a larger company, they may provide a template for an acceptable QDRO. Some attorneys turn over the QDRO writing to another attorney that specializes in this area. If a pension is involved, a second QDRO would address this split.

In my case the 401(k) was simply split into two accounts with the same provider, so tax liability was never a risk..
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Old 08-06-2009, 06:20 PM   #5
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All -

Thank you for the help
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Old 08-08-2009, 12:00 PM   #6
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Your Dad's 401(K) doesn't have to be split up. He can leave it alone. He does have to add it's value to the "marital assets", for the divorce. Any money the wife receives in the divorce settlement is tax-free to her. That's how it worked here in Pa, back in 1996, anyway. May depend on your state.

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