Ex-husband offers lousy IRA tax advice

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Dear Dr. Don,
My ex-husband forwarded to me information about early withdrawals from an IRA, as the terms of our divorce decree mandate that he gives me $20,000 from his retirement account. He says he’ll be penalized 35 percent (taxes plus a 10 percent fee).

Does that mean 45 percent off the top or some different configuration? He seems to think I have to take the hit on the 45 percent. I will be checking that out, as my $20,000 just became $11,000. Thank you kindly for your input.
— Concerned Kay

Dear Kay,
Never take tax advice from your ex. Don’t take a check from him for this money, either. Ideally, you can keep the money invested for your retirement by doing a direct transfer into an IRA rollover from his retirement account to your IRA account. If that’s the case, there are no taxes due on the rollover.

Taxes and penalties are due on distributions, not on a qualified rollover. Your ex-husband shouldn’t be taking a distribution from his retirement account and then passing money on to you.

You need professional tax advice on handling the transfer of these assets. You may need legal advice, too, but a tax professional will help you meet your financial goals and manage your tax exposure and let you know whether you should talk to your lawyer.

It’s likely that there was a qualified domestic relations order issued to force the distribution of assets from your ex-husband’s retirement plan to your control.

If you can’t afford to keep the money invested for your retirement in an IRA rollover account, taxes and penalties could be due when the money is distributed out of the account. A retirement plan will subject a distribution to mandatory withholding at 20 percent, and you may be subject to a 10 percent penalty tax if you are not 59½ or older — unless an exception applies to your situation. A properly executed qualified domestic relations order, or QDRO, should provide that exception.