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Ask Lane Your Own Question

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3995
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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I am getting a divorce and will be receiving a settlement from

Resolved Question:

I am getting a divorce and will be receiving a settlement from my husbands 401K in the amount of $65,000. I need to access that money right away to that I can refinance the marital home. I am required to roll it over to a "qualified retirement account." He is trying to avoid the tax penalty for himself. What type account should I roll it over to to minimize the tax penality to myself? Thanks, Jodie
Submitted: 10 months ago.
Category: Tax
Expert:  Lane replied 10 months ago.

Lane :

Hi Jodie

Lane :

Whats happening here is called a QDRO (pronounced KWADRO)

Lane :

Qualified Domestic Relations Order

Lane :

Once it's moved to the IRA

Lane :

it will be asx if youve had the IRA all along

Lane :

It will only be when you pull the money OUT that there will be taxation ... this is dons so that the person giving up the money isn't forced to pay tax on something that's going away AND to motivate the person that gets it to keep it AS a retirement account

Customer:

I get that. He is trying to save himself (I won't go there.LOL). What type of retirement account should I move it to so that when I pull it out I am not hit super hard by the tax penality? I know I will suffer the tax penality but I am not sure which type of account will help me get as much as I can.

Lane :

OK ... if it's a QUADRO, it HAS to be an IRA

Lane :

That's really the only way most jusges will do it

Lane :

Any money you distribute from this IRA will be added to your taxable income (and if you're under 59 an 1/2/ there will be an additional 10% tax penalty) ... so what you MAY want to do is pull some out this year and some out next (maybe just enough that it doesn't put you in a highr tax bracket for that year.

Customer:

My dilema is that I need to have access to $59K for settlement on my refi. To qualify for the refi I have to settle all of the outstanding marital debt. So If I pull out $59K I will have to use the rest for the tax penality I am assuming. Or do I pull it out and then have to write a check? Do I settle the taxes duirng tax season or at the time of withdrawal. This is bad huh?

Lane :

so, lets say you pull 20,000 this year and have 30,000 of Wages or other income ... You really made $50,000 for tax purposes

Lane :

sorry we crossed there .. let me read your post

Customer:

I have a base salary of $94K, I pull out the funds from an IRA at $65K which means I now make $159K. I declare two kids. I am in seriously tax debt huh?

Lane :

ok sorry lost the connection there for a minute

Lane :

let me run the numbers for you

Lane :

You get to claim the kids?

Lane :

also do you itemize? (mortgage interest, property taxes, car tage and title, etc)?

Customer:

Yes, he doesn't know that yet but he has not paid child support all year and I have full physical custody and he has partial physical custody. He has been paying the house payment so he gets to claim that which totally stinks for me. From what I understand now, I can get a basic IRA. Roll his funds over. Take the money out. Do I pay the 10% right then or later? I will itemize. This will be the first year I do my taxes on my own.

Lane :

k ... you won't pay (you CAN have the taxes withheld) until next year in april .. it works just like your W-2 ... if you have them withheld now (or even a part of what you'll owe) it offsets what you have to pay at tax time

Customer:

So say I take the whole 65K, I can take 6500 of that, put it away and pay the taxes in April?

Lane :

Hre are te tax bracket (but nremember this is TAXABLE income You get to take off three exemption n(you and the kids) that's 3,900 x 3 ... plus the itemized or standard deduction

Lane :




































For a single filer



Tax rate



taxable income from $0 to $8,925,



10%



taxable income over $8,925 to $36,250



15%



taxable income over $36,250 to $87,850



25%



on taxable income over $87,850 to $183,250



28%



on taxable income over $183,250 to $398,350



33%



on taxable income over $398,350 to $400,000



35%



on taxable income over $400,000



39.6%


Lane :

ON your questions? that's right ... or MORE .. OR less

Lane :

"question"

Lane :

So lets say you take 65000

Customer:

So I get taxed 10% of the total I take out and then 28% of my total income? This all happens in April?

Lane :

Hang with me here... we're very close

Lane :

95 + 65 = = 160 BUT

Lane :

we subtract 3900 x 3 (exemptions for you and the kids) and we subtract at least the standard deduction of 6100 for a single filer

Lane :

so so we're at 142

Lane :

So taking all of it will add (at 28%) 18200 in taxes PLUS the 6500 penalty for being under 59 and 1/2 =24700

Lane :

SOrry ... but it's better to have all the fact... (help you see around some corners)

Lane :

No, you can offset what you'll owe i April by having some mwithheld ... withholding a little more at work, etc

Lane :

sorry for all the typos NOW, you can ... having some "withheld"

Customer:

I have been withholding at a higher single rate with three exemptions.

Lane :

anything you withhold out nof the distribution OR against other income through your W4 will offset what you owe

Lane :

Again, if you can give me thw withholding amount I can annualize it, put it in a little mode here and do a quick projection]

Customer:

I have to go to a meeting but this was very helpful. So from what I get, I need to put it in a traditional IRA. I will be taxed for everything in April. I can ask to have the remaining amount withheld for tax purposes and I can increase what I am with holding in my paycheck and that will off set what I owe.

Lane :

Yes, and again it's only pulling it OUT, distributing it from the IRA that causes the taxation ... if it's being done as a qdro the going INTO an IRA will be essentially automatic, they should give you directions or your atty will have you open the IRA for this purpose

Lane :

But yes, you have it

Lane :

If this HAS helped, I would appreciate a feedback rating of 3 (OK) or better (excellent, is ideal)… That's the only way they will pay us here.


HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.

Customer:

Thank you!

Lane :

you're very welcome

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3995
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 3 other Tax Specialists are ready to help you
Expert:  Lane replied 10 months ago.

Thanks for the rating Jodie!


If you'd like to work with ME again just say "For Lane only," at the beginning of your next question


OR set me up as your preferred expert on your home page.

.. be glad to run the numbers for you.


Regardless, thanks again,

Lane


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