|
Claiming half of your ex's 401(k) after the divorce
Dear Dollar Diva,
My ex-husband is required to give me
one half of his 401(k) plan as part of our divorce settlement. Is
there any way this can be treated as a rollover so as to avoid paying
taxes on the distribution?
Barbara
Dear Barbara,
Yes, the distribution can be rolled over tax-free into a traditional
rollover IRA, but you'd better make sure it's done right or
you (not your ex-husband) will end up holding the bag for the taxes
due.
In order for the rollover to be tax-free, it needs
to be rolled over under a Qualified Domestic Relations Order (QDRO).
A QDRO is a court order saying that you are entitled to half of
your husband's 401(k) plan. It must include:
- Your husband's name, address
and Social Security number as the participant; your name, address
and Social Security number as the alternate person to receive
the benefits.
- How much, or what percentage, you are entitled
to receive.
- When the payments will be made to you.
- Name of plan(s) to be rolled over.
Timing is everything; make the rollovers too early
or too late, and say hello to a hefty tax bite:
- Wait until the marital agreement is signed, sealed
and delivered before making the rollover.
- Make sure distributions are made within one year
of the dissolution of the marriage; after that it's not considered
"incident to divorce."
- Rollovers must be made within 60 days of receiving
the distributions.
QDRO must be approved
The court issues a Domestic Relations Order, ordering half the 401(k)
plan to go to you; it doesn't become a QDRO until your husband's
401(k)-plan administrator approves it.
It's not a bad idea to have the QDRO pre-approved by
the plan administrator before the court enters it. Otherwise, if
changes need to be made, the court has to keep re-entering the order
until it gets the plan administrator's thumbs up; this can be a
time-consuming and expensive process.
For more on QDRO rollovers, read IRS
Publication 575, Pension and Annuity Income.
-- Posted: Jan. 28, 2002
 DOROTHY
ROSEN has a master's degree in finance, with a specialization in
accounting, from the Kellogg Graduate School at Northwestern University
in Evanston, Ill. Rosen has more than 15 years of experience in
the financial arena, serving in Illinois and Florida as a certified
public accountant, financial consultant, expert witness and educator.
She is owner of Dorothy Rosen, CPA, a public accounting firm that
serves individuals and small businesses.
|
