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I recently got divorced. As part of the divorce decree I was…

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I recently got divorced...

I recently got divorced. As part of the divorce decree I was to make a one time payment of 10k to my wife that was to represent her equity in the house. I was unable to do a cash out refi because we didn’t have enough equity in the house. I took a loan from my 401k to cover the 10k. My question if the 10k is changed from a loan to a withdrawal would I be responsible for the taxes seeing as how that money ultimately went to my wife as part of the divorce settlement?

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Submitted: 8 months ago.Category: Finance
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11/18/2017
Financial Professional: Tax.appeal.168, Accountant replied 8 months ago
Tax.appeal.168
Tax.appeal.168, Accountant
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Financial Professional: Tax.appeal.168, Accountant replied 8 months ago

Q: My question if the 10k is changed from a loan to a withdrawal would I be responsible for the taxes seeing as how that money ultimately went to my wife as part of the divorce settlement?

A: The withdrawn amount is taxable as ordinary income regardless. However, if the 401k withdrawal was not stipulated by a Qualifications Domestic Relation Order (QDRO), you are also on the hook for the 10% early withdrawal penalty. SEE BELOW;

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The cost and complexity of the division of a 401k in divorce is only one part of the consideration. There are potential benefits to using proceeds from a 401k in divorce. For example, if cash is needed, you may be able to avoid the early withdrawal penalty tax if money is withdrawn as part of the divorce decree and withdrawal is done by use of a QDRO.

REFERENCE SOURCE:

https://www.sensiblemoney.com/learn/how-to-divide-a-401k-in-divorce/

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