You know the old joke: If the opposite of “Pro” is “Con,” then what’s the opposite of “Progress”?
As much as We The People like to take swipes at our elected representatives, they actually did something very nice, pertaining to divorce, a few years ago, and I’m continually surprised by how pleasantly surprised so many family-law attorneys are when they learn about it. It’s like a little gift from above.
Of course, I’m all over this one. As a CPA (and also a CERTIFIED FINANCIAL PLANNER™ professional and a Certified Divorce Financial Analyst® professional) who’s devoted to helping women face the financial challenges of divorce, I’m a strict adherent of the rules of that other great institution we all love to hate: the IRS. And this often-missed provision, from Congress, applies to that.
Here’s the deal:
The woman, a.k.a. the non-employee (or “out”) spouse is allowed, legally, to take distributions from her share of her former husband’s 401(k), after divorce, without a penalty.
Were you aware of that?
Do you realize how much that can help you help your clients?
Here’s how it works: Post-QDRO, the woman gets the share of that 401(k) in her name. Then she can take money from that account, penalty-free, indefinitely.
Well, until she turns 59-and-a-half. At that point, the penalties go away anyway.
Mind you, the taxes are still there. But that nasty ten-percent early-withdrawal penalty completely vanishes, as long as she stays on the same employer plan; that is, this advantage goes away if she rolls the account over to her own 401(k). It also doesn’t apply to other retirement accounts, like a SEP-IRA or a Roth IRA.
Power of the purse
If this rule sounds too good to be true, it’s simply because it needs to be used carefully. There’s hardly a woman out there who should go on a post-divorce spending spree simply because of this provision. If a woman withdraws, say, $30k from that plan now, how much will that cost her, in the future, toward her retirement?
The answer depends on her financial goals, and the plan that’s been created to help her attain them.
Yeah: My department.
But as a rule of thumb, know that this penalty-avoidance provision is great for couples who are short on liquidity; indeed, it was crafted with them in mind. Many couples, unfortunately, have a small amount in their checking, savings, or brokerage accounts; the cash they have is often outweighed by debt. But the retirement funds, in the form of the 401(k), can prove useful for things such as a rental-property deposit or a down payment on a home.
In some cases, it’s actually better for the woman not to take advantage of this provision, and roll the money into her own IRA, for example.
When would that be?
Call me and find out. I’d love to set up a quick chat, to show you how I can add extra value to your practice.