husband cashed out 401K before giving half to divorced spous
Hi,
we have a case where husband cashed out 401(k) and then wrote a check for half wife was entitle to due to divorce. wife wants to know if she can deposit this into her own IRA acct. technically she can. right?
divorce paperwork says half of the 401(k) belongs to the wife.
any suggestion what wife can do now. can she deposit into her own IRA as treat as her own retirement money?
Permalink Submitted by mk foss on Wed, 2011-01-05 22:54
I think they totally blew this one. There are court cases with similar sad facts. Once he cashed it out, it’s taxable to him. If she were to deposit it in an IRA, it would be an excess contribution subject to penalties.
They needed to have the 401k split by a QDRO pursuant to the divorce decree. With a QDRO he wouldn’t be taxed on 1/2 of it and she could roll it to an IRA tax-free and treat it as if it had been her retirement funds all along.
Permalink Submitted by Jose Morales on Thu, 2011-01-06 00:12
When it comes to this situation is is always best to wait until the court order is obtained and then the funds in the plan could be split via QDRO. If the husband took a full distribution of the 401K in anticipation of the court order (regardless of good or bad intent) then it is most likely fully taxable to him. If he now wants to give half to the spouse it would be as a gift.
Can the husband still rollover the funds to an IRA? The spouse could then go back to the court and seek an order to have the IRA split. If the husband is not agreeable to a rollover, maybe the spouse can tell the court of the husband’s actions which have robbed her of an option that would have been available had the funds still been in a 401K at the time the order was given.