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Buyout remaining alimony from 401k post judgment in New Jersey?

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cbarbera

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

I'm a resident of New Jersey and divorced. I'm in need of legal advice from someone familiar with New Jersey state divorce laws. I currently pay approximately 1,200.00 in alimony to my ex-wife until August of 2016. I would like to explore a post judgment amendment to the original court order that will allow me to pay the remaining lump sum of alimony from my 401k. I would also like to know if I can avoid any penalties for accessing my 401k in this way beyond any applicable taxes I would need to pay. If this is a viable option I would very much like to proceed and don't know where to begin.

Chris
 


LdiJ

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

I'm a resident of New Jersey and divorced. I'm in need of legal advice from someone familiar with New Jersey state divorce laws. I currently pay approximately 1,200.00 in alimony to my ex-wife until August of 2016. I would like to explore a post judgment amendment to the original court order that will allow me to pay the remaining lump sum of alimony from my 401k. I would also like to know if I can avoid any penalties for accessing my 401k in this way beyond any applicable taxes I would need to pay. If this is a viable option I would very much like to proceed and don't know where to begin.

Chris
There is no exclusion from penalty for paying off alimony in a lump sum.

Why would you need a court order to pay off your alimony in a lump sum? I doubt that your ex would object to that.
 

cbarbera

Junior Member
There is no exclusion from penalty for paying off alimony in a lump sum.

Why would you need a court order to pay off your alimony in a lump sum? I doubt that your ex would object to that.
My wages are subject to garnishment, therefore I would need a change to the order to cease the alimony garnishment once the lump sum has been payed. I found this link online that discusses avoiding the 10% penalty.

divorce-finances.com/articles/bid/46343/Providing-spouses-penalty-free-access-to-retirement-funds-in-divorce
 

Bali Hai

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

I'm a resident of New Jersey and divorced. I'm in need of legal advice from someone familiar with New Jersey state divorce laws. I currently pay approximately 1,200.00 in alimony to my ex-wife until August of 2016. I would like to explore a post judgment amendment to the original court order that will allow me to pay the remaining lump sum of alimony from my 401k. I would also like to know if I can avoid any penalties for accessing my 401k in this way beyond any applicable taxes I would need to pay. If this is a viable option I would very much like to proceed and don't know where to begin.

Chris
Not a smart move at all. First your plan must provide for a hardship distribution if you're under the age of 59.5 years, and even then you can't avoid a 10%penality plus taxes owed. Let's say you do this and pay the penality and taxes and hand over 26k to your ex wife. The very next month your wife dies and you are out all that money.

I would just pay the minimum alimony amount required and keep growing your 401k.
 

Zigner

Senior Member, Non-Attorney
Do you have a QDRO in place already that gives your ex-spouse a percentage of your retirement plan?
 

cbarbera

Junior Member
Do you have a QDRO in place already that gives your ex-spouse a percentage of your retirement plan?
No, I was granted 100% of my 401k and retirement plan. Therefore, I have full ownership and control.

Not a smart move at all. First your plan must provide for a hardship distribution if you're under the age of 59.5 years, and even then you can't avoid a 10%penality plus taxes owed. Let's say you do this and pay the penality and taxes and hand over 26k to your ex wife. The very next month your wife dies and you are out all that money.

I would just pay the minimum alimony amount required and keep growing your 401k.
Ha! I'm willing to take that risk. This is a significant financial burden for me. It has a tremendous impact on my quality of life. I need financial relief in order to maintain my costs of living.
 

cbarbera

Junior Member
This is what I found on the subject...

Many spouses caught in the trauma of the divorce settlement process face the same problem. They have a need for cash but most of the savings is in retirement. One or both may have significant retirement accounts with their employer, but believe or have been told that these funds are not available to them without the IRS 10% penalty tax.

Most times, it is not sound financial planning to liquidate all or part of your retirement funds for purposes other than retirement; however, this may be the only source of cash available to maintain one’s standard of living.

Under section (72(t)(2)(c) of the Internal Revenue Code , an alternative payee (i.e. the non-employee spouse) can take cash from a Qualified Plan (such as a 401k), without the 10% penalty, even if they are under age 59½. To avoid the penalty, the following criteria must be met:

The retirement plan must be a qualified plan covered by ERISA (e.g. 401K and other Defined Contribution Plans);
The funds must be paid to an alternative payee, not the owner of the account; and
A Qualified Domestic Relations Order (QDRO) must be created and used to divide the plan

The amount paid is taxable income to the alternate payee and the employer will withhold 20% of the distribution to prepay the tax. So whatever non-employee’s cash need is, the 20% withholding should be taken into account when asking for a withdrawal. If the spouse who is entitled to the distribution does not need all of the cash, part could be paid in cash and part could be transferred to that spouse’s IRA. There will not be a 10% early distribution penalty on the cash paid out or the transfer.
 

LdiJ

Senior Member
This is what I found on the subject...

Many spouses caught in the trauma of the divorce settlement process face the same problem. They have a need for cash but most of the savings is in retirement. One or both may have significant retirement accounts with their employer, but believe or have been told that these funds are not available to them without the IRS 10% penalty tax.

Most times, it is not sound financial planning to liquidate all or part of your retirement funds for purposes other than retirement; however, this may be the only source of cash available to maintain one’s standard of living.

Under section (72(t)(2)(c) of the Internal Revenue Code , an alternative payee (i.e. the non-employee spouse) can take cash from a Qualified Plan (such as a 401k), without the 10% penalty, even if they are under age 59½. To avoid the penalty, the following criteria must be met:

The retirement plan must be a qualified plan covered by ERISA (e.g. 401K and other Defined Contribution Plans);
The funds must be paid to an alternative payee, not the owner of the account; and
A Qualified Domestic Relations Order (QDRO) must be created and used to divide the plan

The amount paid is taxable income to the alternate payee and the employer will withhold 20% of the distribution to prepay the tax. So whatever non-employee’s cash need is, the 20% withholding should be taken into account when asking for a withdrawal. If the spouse who is entitled to the distribution does not need all of the cash, part could be paid in cash and part could be transferred to that spouse’s IRA. There will not be a 10% early distribution penalty on the cash paid out or the transfer.
QDROs only apply to dividing retirements accounts as the result of a divorce. It does not apply to taking out money to pay alimony off I a lump sum. Sorry, but that is reality.
 

Zigner

Senior Member, Non-Attorney
Assuming a 10% penalty (correct me if I'm wrong): You're really only looking at the value ~2 months of alimony payments as the penalty. I think you need to decide if your present "quality of life" is worth that hit.
 

LdiJ

Senior Member
Assuming a 10% penalty (correct me if I'm wrong): You're really only looking at the value ~2 months of alimony payments as the penalty. I think you need to decide if your present "quality of life" is worth that hit.
And the tax hit as well. While his regular, periodic alimony payments are tax deductible, he may have to fight with the IRS over the lump sum payment...and even if he doesn't, the lump sum amount is going to increase his taxable income as it will not be coming out of his regular pay, but rather out of extra income he will have created for that tax year.
 

Zigner

Senior Member, Non-Attorney
And the tax hit as well. While his regular, periodic alimony payments are tax deductible, he may have to fight with the IRS over the lump sum payment...and even if he doesn't, the lump sum amount is going to increase his taxable income as it will not be coming out of his regular pay, but rather out of extra income he will have created for that tax year.
I agree, but the OP's original question was only about avoiding the penalty:

I would also like to know if I can avoid any penalties for accessing my 401k in this way beyond any applicable taxes I would need to pay.
 

cbarbera

Junior Member
Assuming a 10% penalty (correct me if I'm wrong): You're really only looking at the value ~2 months of alimony payments as the penalty. I think you need to decide if your present "quality of life" is worth that hit.
I would gladly pay that. I would even be willing to have the judgement go into effect in March to further mitigate any financial impacts. If there's a light at the end of the tunnel I can sustain a little longer.

Presently I live on 30% of my income. My bi-weekly pay after garnishment is 945.00. It's very difficult to live on $1,800.00/month. eliminating the alimony from the equation would have a life altering effect on my present financial situation...
 

LdiJ

Senior Member
I would gladly pay that. I would even be willing to have the judgement go into effect in March to further mitigate any financial impacts. If there's a light at the end of the tunnel I can sustain a little longer.

Presently I live on 30% of my income. My bi-weekly pay after garnishment is 945.00. It's very difficult to live on $1,800.00/month. eliminating the alimony from the equation would have a life altering effect on my present financial situation...
So would taking out a smaller chunk every 4-6 months to just cover 4-6 months worth of payments, therefore spreading the tax liability out over a longer period of time. You could take out enough in 2014 just to cover the remainder of 2014, then maybe 2-3 withdrawals in 2015 just to cover 2015, and then 1 or 2 in 2016 just to cover 2016. You spread the tax liability out over 3 year instead of incurring it all at once.
 

cbarbera

Junior Member
So would taking out a smaller chunk every 4-6 months to just cover 4-6 months worth of payments, therefore spreading the tax liability out over a longer period of time. You could take out enough in 2014 just to cover the remainder of 2014, then maybe 2-3 withdrawals in 2015 just to cover 2015, and then 1 or 2 in 2016 just to cover 2016. You spread the tax liability out over 3 year instead of incurring it all at once.
Possibly. But not over 3 years. I only have 22 months left. Suppose I waited until March of next year to do this That would leave me with only a year and a half alimony left to address in a buyout. Would that be a better option?
 
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