Should I Trade in My Half of Her 401K From the Divorce for a New Home Down Payment? – Ray

“Dear Steve,

Getting divorced after 25 years. I’m getting 1/2 of her 401k. Because of the home market we will be lucky to get what we owe on the home.

I need a down payment for a new home can I cash out my 1/2 of her 401k to put down on a new house. I’m looking at a $25,000 share of the 401k or trade the 401k for the home. we have 60,000 tied up in the home,

Ray”

The Answer:

 

Dear Ray,

Honestly, I don’t know. Much of if this is a right move for you or not depends on the tax ramifications of the disbursement to you. I’d suggest you talk to a tax adviser about his important issue. I’m just not certain how a disbursement from a 401(k) is treated in this situation or if the money can be taken penalty free and how much you will lose to taxes. All of that is a big consideration in determining if this make sense.

Please update me on your progress by posting updates here in the comments section of your question. I’m very interested in how this works out for you.

Big Hug!

Should I Trade in My Half of Her 401K From the Divorce for a New Home Down Payment? Ray divorce 401k ask the get out of debt expert
@GetOutOfDebtGuy

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  • http://www.joetaxpayer.com JoeTaxpayer

    QDRO (pronounced quad-row), my friend. It stands for Qualified Domestic Relations Order and is the way spouses split accounts due to divorce which otherwise would only get an ownership change due to death. The result of this is that regardless of the age of the recipient, the 10% penalty is waived for a withdrawal, via a (IRS) form 5329.

    But – a divorce and proper QDRO do not eliminate the tax due. The lawyers involved should be smart enough to know to treat the 401(k) dollars in an after-tax way, (e.g. she is a high earner, single will be in 33% bracket, $10K in 401 is worth $6667. You are just above min wage, $10K in the 401(k) is worth $9000 to you) due to different tax brackets. An exaggerated example, but important to understand that a house dollar and a 401(k) dollar are not equivalent. As Steve offered, visit here to keep us posted and ask if you need anything else.
    Joe
    .-= JoeTaxpayer´s last blog ..Frugal Friday Week 25 =-.

    • http://GetOutOfDebt.org Steve Rhode

      Joe,

      And there you go. Excellent advice from a talented person. Thanks for the assist.

      Steve

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