9 Mistakes you can make when transferring your ex-spouse’s defined contribution plan into an ira—and how some ways to make money to avoid them — lawrence financial planning

In many divorces, a qualified retirement plan (such as a 401k) can be the larges t asset for the spouses to what are some ways to make money divide. This is especially true when there isn’t a house at stake. While each employee should be familiar with the rules (or be able to talk with their plan administrator), this can be a big challenge for the non-employee spouse. In most cases, the spouse has had little or no knowledge of the what are some ways to make money qualified plan details , because that’s what the employee spouse usually did.

Because a divorce usually has so many competing priorities, it’s easy to make mistakes when it comes to dividing what are some ways to make money assets. When it comes to dividing a retirement plan, some of those mistakes can lead to paying unnecessary taxes what are some ways to make money (or penalties along with those taxes). With a little diligence, it is possible for both spouses to keep their fair what are some ways to make money share without uncle sam taking a cut.

The QDRO cannot make the plan administrator do anything that what are some ways to make money the plan doesn’t already allow. In fact, the plan administrator, following the plan’s procedures, has the authority (and responsibility) for determining whether a domestic relations order is actually qualified what are some ways to make money in the first place. In other words, if the court order tries to achieve something that’s not allowed in the plan, then the administrator can determine that the order is not what are some ways to make money ‘qualified.’ which means it has to go back to the court what are some ways to make money to be rewritten in a manner that complies with the what are some ways to make money plan procedures.

Make the QDRO a priority in finalizing the divorce. As long as the marriage still exists, you have certain rights within the retirement plan . For example, any ERISA plan is required to make the spouse the what are some ways to make money default beneficiary in case the participant dies. However, all bets are off once the divorce is final. While it might not always be practical to have the what are some ways to make money QDRO finalized by the time the divorce papers are signed, you should at least be far along enough to see what are some ways to make money the finish line.

Hold your lawyer accountable for drafting the QDRO. No one is responsible for drafting a QDRO, so don’t assume that it just gets done as part of what are some ways to make money the divorce process. Furthermore, most attorneys will agree that it is the non-employee spouse’s (or alternate payee’s, as the plan may call you) responsibility to ensure the QDRO is signed by the judge what are some ways to make money AND accepted by the 401k administrator. After all, you’re the one who loses out if no action is what are some ways to make money taken.

Have the plan administrator review a draft version of the what are some ways to make money QDRO before it goes for signature. Not all plan administrators will do this. However, if your spouse’s plan does allow for this, you should have your lawyer send a draft copy to what are some ways to make money the administrator. That way, you can make any necessary adjustments before the judge signs what are some ways to make money off. Done correctly, this should help to minimize unnecessary re-writes.

Familiarize yourself with all the employee benefits. While it’s important to understand what you might be entitled to what are some ways to make money under the plan itself, you should take the time to review ALL available employee what are some ways to make money benefits. You might find other available plans or benefits that you what are some ways to make money could be otherwise entitled to , such as a health savings account or a non-qualified plan.

60-day rollover: if you don’t arrange for a direct rollover from the plan administrator, you will receive a check for the specified amount, minus taxes. The IRS requires that all retirement plan distributions (not including direct rollovers), be subject to a 20% withholding, even if you intend to roll it over later . Generally speaking , you have 60 days from the date you receive a what are some ways to make money distribution to roll it over into another plan or IRA what are some ways to make money . After 60 days, that money is considered to be taxable income, and subject to taxes (and possibly an early withdrawal penalty).

You don’t have a QDRO on file , but you decide to pull the money out anyway . Under IRC §72(t)(2)(c), one of the exceptions to the early withdrawal penalty is what are some ways to make money if the money is paid to ‘an alternate payee under a QDRO.’ however, due to cash needs, you might be tempted to have your soon-to-be ex-spouse pull the money out (if possible), then send you the proceeds. In most cases, this probably will end up in a result that neither what are some ways to make money of you want . Yet another reason to make sure your QDRO gets done what are some ways to make money properly .

You don’t replace the taxes withheld. When issuing a distribution to a non-retirement account, ERISA plan administrators are required to withhold 20% of the distribution and remit them to the IRS for what are some ways to make money tax purposes. This is true in all cases, even if you intend to put the money back into what are some ways to make money a retirement account in the future. The primary exception to this is when the plan administrator what are some ways to make money sends a distribution check to you, but it’s made out to the IRA or other retirement plan what are some ways to make money account. However, if taxes were withheld, you have to fund the new account with the entire what are some ways to make money gross distribution, including the withheld taxes . Even if you use funds from another account. Otherwise, the distribution does not comply with the 60-day rollover rule.

For example, if you receive $50,000 from your ex-husband’s 401(k) in the form of a check made out to you, you should expect that check to be $40,000 ($50,000 minus 20%). Let’s say you plan to roll this over into a what are some ways to make money new IRA you set up. In order to qualify as a non-taxable event, you would need to deposit the $40,000 into your IRA , plus $10,000 to make up for the taxes that were withheld what are some ways to make money . Otherwise, it doesn’t count as a rollover.

Arrange for a direct transfer or rollover. If possible, avoid having the money sent to you directly. As long as the money is kept out of your what are some ways to make money hands, the plan administrator does not have to withhold taxes, and does not have to report it as a taxable what are some ways to make money event to the IRS. If they insist on sending you a check, check with your financial institution to make sure you understand what are some ways to make money how the check should be made out. Usually, the check will be made payable to your new account, but you can avoid any hassles by verifying the exact what are some ways to make money verbiage that should be on the check.

As previously discussed, under IRC §72(t)(2)(c), one of the exceptions to the early withdrawal penalty is what are some ways to make money if the money is paid to ‘an alternate payee under a QDRO.’ if your intention is to use some of the proceeds what are some ways to make money to pay for living expenses or a purchase (like a car or house down payment), you might want to take a hard look at the what are some ways to make money available options.

But there might not be any, and this is your only choice. That’s okay. But while you should expect to pay taxes, you should NEVER pay a penalty, even if you’re under the age of 59 ½ (the magic age for people to withdraw money from a what are some ways to make money retirement plan without penalty). Here are some things you need to do to ensure what are some ways to make money that you don’t pay early withdrawal penalties (if you’re subject to them) :

When most people consider a defined contribution plan, they think about employee contributions. But depending on the plan, and how long your ex-spouse has been participating in that plan, there could be a substantial amount of employer contributions as what are some ways to make money well. It’s important not to overlook the employer contributions when dividing what are some ways to make money up the plan. But first, a little background:

Employer contributions are a little different. Employer contributions are either vested or non- vested . Vested employer contributions are portable, just like employee contributions are. Non- vested employer contributions are not portable. While the account balance usually reflects both vested & non- vested employer contributions, non- vested contributions usually disappear if the employee leaves the company.

If there is a significant amount of non- vested contributions at stake, have a discussion with your lawyer . This is where things get sticky. Depending on which state you’re in, and what type of plan you’re discussing, there is no easy way to determine where this will what are some ways to make money go. While many states recognize non-vested contributions, you’ll want to have an in depth discussion on how what are some ways to make money this might play out.

One of the biggest tax mistakes you can make, in any divorce situation, is assuming that all retirement plans have the same tax what are some ways to make money treatment. When comparing a $100,000 traditional IRA to a $100,000 roth IRA, you should understand that qualified distributions from a traditional IRA what are some ways to make money will always be taxed, because the contributions were tax-deductible (or pre-tax contributions). Qualified distributions from a roth IRA are not taxed, because the contributions were made with after-tax dollars.

So let’s assume that you have a $100,000 traditional IRA and your soon-to-be ex-spouse has a $100,000 roth IRA. Since they are individual accounts, it might be easier to just declare your account to what are some ways to make money be yours, and his account to be his. However, let’s look at the after-tax value of these accounts, not including investment returns. Assuming that you’re in the 22% tax bracket, over time, $100,000 in your traditional IRA would only yield $78,000. At the same time, your ex-spouse would be able to pull $100,000 out of his roth account tax-free ( assuming that his withdrawals are qualified distributions).

Since the tax treatment of a roth IRA and a what are some ways to make money roth 401(k) are the same, the same principle applies to dividing 401(k) plans, or when trying to divide multiple 401(k) plans AND iras. The best way to avoid this mistake is to ensure what are some ways to make money you know which accounts are roth accounts (tax free qualified distributions), and traditional retirement accounts (taxable qualified distributions).

If creditors might be coming after you, then you’ll need to plan accordingly. ERISA protects most employer plans, like 401(k) plans, from creditors . This includes bankruptcy and non-bankruptcy situations. However, once those assets move from a 401(k) plan to a non-ERISA plan, like an IRA, the rules change. In this case, those assets would be protected under federal law in a what are some ways to make money bankruptcy case ( as long as the money originally came from an ERISA what are some ways to make money plan). However, in a non-bankruptcy case, state rules would apply.

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