I'm in the process of getting a divorce and I will have to give my spouse some of my 401K. I know that I will have to pay 20% in taxes and a 10% withdrawal fee when it is distributed to him. He will not roll it over since he needs the money to pay his debts. My question is if I'm in a 28% tax bracket, will I have to pay an additional 8% on the amount withdrawn at the end of the tax year in which it was withdrawn? Will my spouse have to pay any taxes on the amount he received?

Actually, the 10% early withdrawal penalty is waived if you can show that the withdrawal is a direct result of the divorce.

Further, you should tell your attorney to roll the money rolled over directly into a rollover IRA in his name. That way, it retains its tax-deferred status and is properly transferred to him as the tax-deferred portion of your marital estate. This way, no taxes will be due on your part.

Then, if he needs the money, HE can make the withdrawal from the rollover IRA and HE will pay the taxes and the 10% Early Withdrawal Penalty.

If he refuses to cooperate by not signing off on the rollover IRA set-up, the divorce settlenent should be renegotiated to factor in the additional taxes YOU will have pay by sending the check directly to him. These additional taxes can be easily calculated using tax software.

I had a client who was on the receiving end of the 401K distribution, and her husband had to pay the taxes associated with the distribution because he failed to properly research the matter, nor did he get competent tax advice. For the record, he was ALSO my client (I did their taxes while they were a happy married couple), but I did not find out about the divorce until after the fact. This was a classic case of what you do not know CAN hurt you!