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

[Bali Hai]

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?

No. You need to contact Dave Ramsey.

http://www.daveramsey.com/home/

 

[cbarbera]

Yes, but those 22 months contain three tax years. 2014, 2015, and 2016.

So if I did this next year could I do a buy out of 12 months instead and continue to pay garnishment for only 8 months? And could I have the 8 months of garnishment spread out over 12 months to add a little more to my available income?

 

[Bali Hai]

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.

This applies to an alternate payee after a QDRO has been executed. That is not you.

 

[cbarbera]

No. You need to contact Dave Ramsey.

http://www.daveramsey.com/home/

LOL! Nice affiliate link.

 

[LdiJ]

So if I did this next year could I do a buy out of 12 months instead and continue to pay garnishment for only 8 months? And could I have the 8 months of garnishment spread out over 12 months to add a little more to my available income?

No, that is not what I am saying at all. I am saying to keep paying by the garnishment, but take distributions out to supplement your income. Just don't take it all out in the same year. Take some out in 2014, some out in 2015, and some out in 2016...to spread out the tax burden and minimize the amount of taxes you will have to pay. There is no reason to do go the legal route of doing a buyout, when you can replace the income with spread out distributions.

 

[Bali Hai]

No, that is not what I am saying at all. I am saying to keep paying by the garnishment, but take distributions out to supplement your income. Just don't take it all out in the same year. Take some out in 2014, some out in 2015, and some out in 2016...to spread out the tax burden and minimize the amount of taxes you will have to pay. There is no reason to do go the legal route of doing a buyout, when you can replace the income with spread out distributions.

Depending on the 401k plan rules, OP may not be allowed to take distributions currently. Employer contributions to the plan may restrict him from doing this, while employee contributions may not.

In any event, OP needs some education about financial matters. So does the idiot NJ judge who ordered him to pay $1200/mo. alimony from a 3k/mo. income.

 

[Zigner]

So does the idiot NJ judge who ordered him to pay $1200/mo. alimony from a 3k/mo. income.

To be fair, you have NO information on how the figure was arrived at.

 

[Bali Hai]

To be fair, you have NO information on how the figure was arrived at.

You are 100 percent correct about that Zig. I stand in wait until that information is disseminated.

 

[single317dad]

Why not fund an account that will pay out all the alimony payments on time, but you (OP) will be the beneficiary of any interest gains over the time the money is paid out? That would recover a very small part of the penalties.

 

[LdiJ]

Why not fund an account that will pay out all the alimony payments on time, but you (OP) will be the beneficiary of any interest gains over the time the money is paid out? That would recover a very small part of the penalties.

Its being garnished from his wages so that is problematic...however a fund to reimburse himself for the paid out alimony would work. However...that doesn't solve the tax problem. I feel strongly that a single lump sum distribution from a retirement account is NOT in his best interest.

Let me give an example. For the sake of the example lets say that the OP's 3000.00 a month is net rather than gross, and that he makes about 45k per year. Right now his federal tax bite is about the following: 45k - 6100.00 standard deduction, and 3900.00 personal exemption, minus 14400.00 in alimony for a taxable income of 20600.00 which would put him firmly in the 15% marginal tax bracket and would result in a federal tax bit of 2644.00.

If he takes a lump sum distribution and if he gets lucky and the IRS doesn't challenge that lump sum payment as alimony, he could end up only owing an addition 2640.00 in tax (the early withdrawal penalty). If he takes a lump sum distribution in one tax year, and the IRS challenges it that adds 26400.00 to his income, making his taxable income 47000.00. That makes a tax bite of 10959.00 (including the 10% penalty) with about 11,000 of that taxable income being in the 25% tax bracket.

Therefore, a single lump sum could cost him 7675.00. However, if he spreads the distributions over the three tax years involved, he will easily stay out of the 25% tax bracket, won't be subject to any IRS challenge and therefore he will reduce the potential cost of that distribution by a total of 2060.00 over those three tax years.

Please note that my figures do not take any state tax implications into consideration. Those, of course, could raise the cost.

 

[Bali Hai]

Its being garnished from his wages so that is problematic...however a fund to reimburse himself for the paid out alimony would work. However...that doesn't solve the tax problem. I feel strongly that a single lump sum distribution from a retirement account is NOT in his best interest.

Let me give an example. For the sake of the example lets say that the OP's 3000.00 a month is net rather than gross, and that he makes about 45k per year. Right now his federal tax bite is about the following: 45k - 6100.00 standard deduction, and 3900.00 personal exemption, minus 14400.00 in alimony for a taxable income of 20600.00 which would put him firmly in the 15% marginal tax bracket and would result in a federal tax bit of 2644.00.

If he takes a lump sum distribution and if he gets lucky and the IRS doesn't challenge that lump sum payment as alimony, he could end up only owing an addition 2640.00 in tax (the early withdrawal penalty). If he takes a lump sum distribution in one tax year, and the IRS challenges it that adds 26400.00 to his income, making his taxable income 47000.00. That makes a tax bite of 10959.00 (including the 10% penalty) with about 11,000 of that taxable income being in the 25% tax bracket.

Therefore, a single lump sum could cost him 7675.00. However, if he spreads the distributions over the three tax years involved, he will easily stay out of the 25% tax bracket, won't be subject to any IRS challenge and therefore he will reduce the potential cost of that distribution by a total of 2060.00 over those three tax years.

Please note that my figures do not take any state tax implications into consideration. Those, of course, could raise the cost.

OP is going to do what he is going to do. He seems a bit niave when it comes to finances. That would explain the rediculous amount of alimony he is paying. He also is putting way too much emphasis on his lifestyle for the next 22 months.

If it were me, I would live on peanut butter sandwiches (maybe add some jelly on Saturday nights), koolaid and get through the next 22 months with more in my 401k and not less at the end. If he does anything else, he might feel good initially, but when it's over he'll look back and say, "why the hell did I do that"!)

At least he has an end date to the alimony.

 

[LdiJ]

OP is going to do what he is going to do. He seems a bit niave when it comes to finances. That would explain the rediculous amount of alimony he is paying. He also is putting way too much emphasis on his lifestyle for the next 22 months.

If it were me, I would live on peanut butter sandwiches (maybe add some jelly on Saturday nights), koolaid and get through the next 22 months with more in my 401k and not less at the end. If he does anything else, he might feel good initially, but when it's over he'll look back and say, "why the hell did I do that"!)

At least he has an end date to the alimony.

Personally I would do the same, except perhaps if I had a true emergency I might tap the retirement account for the funds I needed to deal with the emergency.

 

[cbarbera]

First, thank you all for the valuable feedback and responses to my post.

For the record, I am a bit naive to personal finances as one person suggested.

The alimony was determined by an MESP panel for early settlement. The amount of the alimony was based upon my ex-wife and the fact that she was a stay at home, non-working mother at the time of the divorce. Sadly this meant that I had to take the extra hit on alimony to maintain her standard of living. The marriage ended in January of 2012 and since that time I've managed to get by on my limited income. The reason I'm running in panic mode now is that my ex wife is now asking for an additional 700.00 per month from me for daycare expenses. Obviously I cannot sustain that additional burden along with my already existing obligations to her. On top of everything I still need to support myself, and believe me, I'm not exactly living comfortably. I still have bills like everyone else.

A little more background... She has an Ivy League degree and chose not to work. Therefore based on her pedigree, the court imputed her at an income of 30,000. It is her intention to now go to work full time, which is good for her. But as a result the daycare/aftercare expenses for our 2 children will cost a whopping 1,100.00 a month of which she expects me to pay 745.00 per month. It should be noted that her chosen job will not exceed the 30,000.00 that was imputed to her in the early settlement agreement.

What irritates the hell out of me, and what I can't get my mind around is... Why does she get a net gain in income by her decision to work, and why do I get a net loss in income? Why should I have to suffer more penalties just because she's going to work? Why can't her additional income be used to offset alimony?

This is what drove me to make this post, because I'm frantically grasping at anything to minimize further impacts to my income. At a certain point I'm just going to work for free.

 

[LdiJ]

First, thank you all for the valuable feedback and responses to my post.

For the record, I am a bit naive to personal finances as one person suggested.

The alimony was determined by an MESP panel for early settlement. The amount of the alimony was based upon my ex-wife and the fact that she was a stay at home, non-working mother at the time of the divorce. Sadly this meant that I had to take the extra hit on alimony to maintain her standard of living. The marriage ended in January of 2012 and since that time I've managed to get by on my limited income. The reason I'm running in panic mode now is that my ex wife is now asking for an additional 700.00 per month from me for daycare expenses. Obviously I cannot sustain that additional burden along with my already existing obligations to her. On top of everything I still need to support myself, and believe me, I'm not exactly living comfortably. I still have bills like everyone else.

A little more background... She has an Ivy League degree and chose not to work. Therefore based on her pedigree, the court imputed her at an income of 30,000. It is her intention to now go to work full time, which is good for her. But as a result the daycare/aftercare expenses for our 2 children will cost a whopping 1,100.00 a month of which she expects me to pay 745.00 per month. It should be noted that her chosen job will not exceed the 30,000.00 that was imputed to her in the early settlement agreement.

What irritates the hell out of me, and what I can't get my mind around is... Why does she get a net gain in income by her decision to work, and why do I get a net loss in income? Why should I have to suffer more penalties just because she's going to work? Why can't her additional income be used to offset alimony?

This is what drove me to make this post, because I'm frantically grasping at anything to minimize further impacts to my income. At a certain point I'm just going to work for free.

WAIT A MINUTE!

You have talked entirely about alimony this entire time...NOT child support. If any of that $1200.00 is child support that would change the entire nature of the situation...also, if you are not paying any child support now that could also be problematic from a tax standpoint, as it could mean that all of your support has been characterized as alimony when some of it should be non-deductible child support. Child support also cannot end until the children reach the age of majority.

 

[cbarbera]

WAIT A MINUTE!

You have talked entirely about alimony this entire time...NOT child support. If any of that $1200.00 is child support that would change the entire nature of the situation...also, if you are not paying any child support now that could also be problematic from a tax standpoint, as it could mean that all of your support has been characterized as alimony when some of it should be non-deductible child support. Child support also cannot end until the children reach the age of majority.

No, I pay 200.00 per week additional in child support. So roughly 800.00/month, then about another 1,200.00/month in alimony. So She gets 2,000.00/month from me and now wants to go to work and is asking for another 745.00/month.

Her stance on this is that her job pays her less than 30,000 so her income remains unchanged or to her favor because it's less than the imputed 30k. In addition she maintains that the courts won't care how little I have t live with as long as the kids are taken care of.

How am I supposed to survive? I'm in a constant state of anxiety and suffering. I don't even know what my rights are and hiring an attorney with practically put me out of my home. "Passive terrorism" is the only term I can describe for what she's putting me through.