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Ask Lane Your Own Question
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 11169
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I'm getting divorced and my wife is getting paid a portion

Customer Question

I'm getting divorced and my wife is getting paid a portion of my 401K and pension. How much tax will she have to pay on this money and is there a way to minimize the taxes paid?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Hi,

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The judge should issue what's called a QDRO (Qualified Domestic Relations Order ) a court order to the plan administrator that this is not a taxable distribution and your ex establishes an IRS for the $ to "land in."

Customer: replied 1 year ago.
But that's only if my spouse puts it in a qualified retirement plan correct? She's planning on buying a house with the money.
Expert:  Lane replied 1 year ago.

Then once the dollars are in the IRA, SHE will then be taxed normally (any money distributed from the resulting IRA will be added to her taxable income for the year withdrawn and if she is under 59 and 1/2 there will bee that additional 10% tax penalty

Expert:  Lane replied 1 year ago.

Yes, but the quadro is what protects YOU from being taxed for the distribution

Expert:  Lane replied 1 year ago.

If you simply pull it out YOU'RE taxed and penalized ... the right way to do tis is do the QDRO and then if she wants to pull all of it out and pay the taxes that's her business

Customer: replied 1 year ago.
Is there any way to prevent getting taxed or minimize it?
Expert:  Lane replied 1 year ago.

Only the QDRO (for you) without that it's income to you and 10% penalty ... just the same as it is for her from the resulting QDRO IRA

Expert:  Lane replied 1 year ago.

Now, pulling some this year and some next (regardless of who's doing the pulling) might keep the amount from pushing whoever distributes from going into a higher tax bracket

Customer: replied 1 year ago.
the amount of the settlement received plus her income to find the tax bracket then 10% on that
Expert:  Lane replied 1 year ago.

anything distributed before 12/31/2015 is a 2015 distribution ... and anything after Jan 1 2016 is a 2016 distribution

Expert:  Lane replied 1 year ago.

That's right

Customer: replied 1 year ago.
If the QDRO is paid to her IRA in 2015 and she take it out in 2016 the taxes are paid in 2016
Expert:  Lane replied 1 year ago.

That's right

Customer: replied 1 year ago.
not sure if this is your area of expertise but if she buys a house with the money there should be some tax breaks on that I belive
Expert:  Lane replied 1 year ago.

Paid in 2017 for tax year 2016 ... although she may want to go ahead and have some withheld from the IRS distribution

Expert:  Lane replied 1 year ago.

It's amazing how commonplace that assumption is ... we here it here all the time ... but sorry, no

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The amount she puts into the house WILL go to her basis in it and lower any gain on eventual sale

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Expert:  Lane replied 1 year ago.

Now, if she qualifies as a 1st time home-buyer (hasn't bought a house in the last two years, for THIS purpose) there IS a waiver of the 10% penalty piece on 10,000 of the distribution if used tp purchase a new home

Expert:  Lane replied 1 year ago.

The only settlement or closing costs you can deduct on your tax return for the year the home was purchased or built are Mortgage Interest and certain Real Estate (property) taxes. These can be deducted in the year you buy your home if you itemize your deductions.

Customer: replied 1 year ago.
Thanks. I think we have enough information. Best to calculate the taxes and pay to IRS. May get some back in First time buyer credits
Expert:  Lane replied 1 year ago.

Glad to help ... yes, knowing is better than going in blind ... and IF the transfer can be done before year end... she can take some out tthis year and take some out next year ... might help a little

Expert:  Lane replied 1 year ago.

If this HAS helped, (and you don't have any other questions on this), I'd really appreciate a positive rating (using those stars on your screen) … That's the only way I'll be credited with a portion of what you've paid JustAnswer.com

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Thank you,

Lane

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