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I'm not sure if this is right board (don't think there is a Divorce Board her) but I have an old friend that called about her divorce dilemma.

In a nutshell he is 60 and she is 57. The divorce is very amicable. As I understand he is transferring X amount of dollars to her from his 401K/IRA. Since he is 59 1/2 can he do this without penalty?

Are there limtations to the amount?

What are her tax consequences in receiving this money?

I appreciate your input.
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I would suggest you go to the Tax Strategies Board and cross-post this question. I believe it is under Personal Finance - Tax Strategies.

Donna
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In a nutshell he is 60 and she is 57. The divorce is very amicable. As I understand he is transferring X amount of dollars to her from his 401K/IRA. Since he is 59 1/2 can he do this without penalty?

In a divorce situation, this can be done without penalty no matter what age. It's called a QDRO (pronounce Quad-ro; Qualified Domestic Relations Order). It will transfer to her pre-tax, and she will have the ability to withdraw the money when she desires and pay taxes on it at that time.

If he withdraws the money from the account, rather than using a QDRO, he will owe tax on the distribution, so it's probably in his best interest to use a QDRO.

Are there limtations to the amount?

Generally, what is negotiated by the parties.

What are her tax consequences in receiving this money?

Assuming he uses a QDRO to transfer the money to her, she will pay taxes on the withdrawals.

AJ
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I learn something new every day. Not that I need this info but information is powerful stuff.

MZ4
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AJ,

Thanks for your learned response. My friend's concern (she is the wife) is what would be the best route for her.

In her words "she has been a kept woman" where were husband dealt with all the financial issues. As I said this has been amicable and he was been the bread winner of the unit but she wants to avoid any tax consequences.

I do no not know his willingness in this matter but it may become a point of contention if she is liable.
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In her words "she has been a kept woman" where were husband dealt with all the financial issues. As I said this has been amicable and he was been the bread winner of the unit but she wants to avoid any tax consequences.

Have your friend consult both an attorney and a tax professional about the QDRO, but it should be able to be structured so that she only has to pay taxes on the withdrawals. As the money was put into the account on a pre-tax basis, they jointly avoided taxes while they were married. She will pay taxes on the withdrawals as she uses the income after the divorce. He will also pay taxes on the withdrawals from his part of the account.

IRS Pub 504 http://www.irs.gov/pub/irs-pdf/p504.pdf will probably be valuable to her.

AJ
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It is great that the situation is amicable now - but there is not assurance it will be in the future. So it is important in my my view to make the break clean and final. Obviously this not the kind of thing that one gets a "Do Over" on. So there is some advantage in getting advise from professionals or at least knowledgeable individuals with no emotional or personal involvement.

Gordon
Atlanta
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AJ,

What EXACTLY do you DO? The wealth of information you contain in that head of yours is incredible. Legal, financial, taxes - you name it, you know it. Please don't embarass the rest of us by saying you are a chef, Spanish teacher, or neurosurgeon and that this is just a hobby.

star
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...The divorce is very amicable..

They should both still have a lawyer to make sure that all the right questions are asked and to help give them information about what sort of settlement is appropriate.

For example, they need to have been married for ten years for her to qualify for payments on his social security benefits, this does not reduce his benefits. If they are just short of the 10 year mark, then they may want to consider waiting to make the divorce official until just after their ten year anniversary. There are lots of things like this that a lawyer would know about.

Greg
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he is transferring X amount of dollars to her from his 401K/IRA.

She's entitled to half. Courts might award more if she has no other income. No tax is assessed until she withdraws it.

Urge her to get a slick lawyer if you think she's getting shafted.
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What EXACTLY do you DO? The wealth of information you contain in that head of yours is incredible. Legal, financial, taxes - you name it, you know it. Please don't embarass the rest of us by saying you are a chef, Spanish teacher, or neurosurgeon and that this is just a hobby.

I've been doing forecasting, budgeting, planning, scheduling, process improvement, etc. for customer service call centers for a while now. The customer service groups I have supported include credit cards (both prime and sub-prime), payroll services, cell phones and mortgages. Prior to that, I worked in the electrical utility service industry (power plant servicing and transmission/distribution equipment) and the aerospace (avionics) industry. So exposure to lots of different industries....

And yes, TMF is a hobby, but one that's related to at least some of my real life. :-)

AJ
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AJ,

Thanks for your input it has been very helpful. A little more detail if you can help.

She happens to be comfortable with a "money manager" that her family has dealt with for years but wants to be a little more aggressive with her portfolio. Her question is...can she direct 90% of the funds to that money manager and divert 10% to a self directed IRA without penalty?

JJ
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She happens to be comfortable with a "money manager" that her family has dealt with for years but wants to be a little more aggressive with her portfolio. Her question is...can she direct 90% of the funds to that money manager and divert 10% to a self directed IRA without penalty?

She should be able to do partial rollovers. Both accounts would have to be IRAs, unless she was willing to pay taxes on the 90% she placed with the money manager. (After taxes, it would probably end up being more like 60%, if she did that.)

AJ
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