fair distribution of 401K$ - post or pre-tax?

[spring2010]

What is the name of your state (only U.S. law)? TEXAS

I have filed for divorce in Texas. My STBX husband does not have a lot of cash flow so we are using a QDRO on his 401K so that he can buy out my half of the house (the cash out refi will not net quite enough), his half of the debt, etc. I know that any money distributed to me for the house and debt should be "grossed up" to account for the taxes I will have to pay on that distribution.

We have agreed that I am due half of the balance in his 401K. Should I ask for this amount to be net (after taxes) or is it more fair to ask for that as a flat amount since I could roll it into an IRA and not incur the tax liability.

We are not talking about a lot of money here and our divorce is amicable and uncontested.

 

[nextwife]

You should each get half of the other's 401k marital accrual. It should be rolled over to the other and kept in retirement account. Should they then "cash it in" the taxes comes out of their portion.

 

[spring2010]

I don't have a 401K, I have a very very small IRA. We will lessen the amount due to me from his 401K by the amount in my IRA.

So are you saying the most fair thing to do would be for my share of his 401K be rolled over and therefor not grossed up for taxes?

 

[nextwife]

Fair AND smartest.

You obviously have not been putting sufficient reitirement savings away. Too many women fail to make sure they are putting sufficient retirements funds of their own away.

Roll over the 401K funds into a retirement acount and do not touchi it until retirement age!

 

[mistoffolees]

Fair AND smartest.

You obviously have not been putting sufficient reitirement savings away. Too many women fail to make sure they are putting sufficient retirements funds of their own away.

Roll over the 401K funds into a retirement acount and do not touchi it until retirement age!

That's all correct.

However, I think OP needs to think about something different.

Let's say that OP is taking on $50 K worth of debt and accepting $50 K in retirement funds in exchange. I agree 110% that the retirement money should be rolled into another retirement account. The problem is the value. She will be paying $50 K in debt on after tax income, but the $50 K in retirement money is PRE-TAX so she will have to pay tax on it when she uses it. That means it is worth less than $50 K.

It is correct that non one knows what the future tax rates will be, but I'll be anything that they will be greater than zero, so a 1:1 swap is not completely fair. I would suggest using the best guess of tax rate upon retirement and adjust accordingly. For example, if your best guess is that you'll be paying 33% tax in retirement, then you'd need $75 K in retirement accounts to offset $50 K in current debt or assets.

To do this, you're going to have to agree with stbx on a tax factor, but even if you are off quite a bit, ANY factor you can add in will work to your benefit (and make the process at least a little more fair).