I am 44 and getting a divorce. I currently have no job and would like to be able to use part of my share of a 401K to pay off some bills that I have. My share would be $13000.00 and would like to use $7000 for the outstanding bills that I will have. I know that I would have to pay some kind of penalty on it and would like to know how much it would be. My income would only be about $7880.00 for the year counting the support that I will be receiving from my ex. How much would be the penalty and taxes that I would have to pay? Would it be better for me to take all of the 401K and not roll any of it over or should I roll over the remainder after I do take the $7000 plus penalty fees out? I need answers fast due to the fact I have to make my decision by the end of the month.

I asssume this is a 401(k) account that was your ex's, and you are getting the $13K as part of the settlement via a Qualified Domestic Reations Order (QDRO) being issued by the court, correct?

You will owe income tax on whatever amount you take as cash (i.e. whatever is not rolled over to another tax-deferred account, such as either a rollover IRA or your own 401(k) plan). The good news is that you will not owe a 10% early withdrawal penalty on the distribution from your ex's account to you, since the distribution is dictated by the QDRO. If you roll the other $6K to your own IRA, it will continue to grow tax deferred. However, be aware that if down the road you need to make a withdrawal from that IRA you will owe taxes plus the 10% penalty if you are under age 59-1/2. Whatever you take now in cash is added to your taxable income, but even if you took it all in cash this year your income tax bill should be quite small. So it actually may be better for you to take the whole $13K now in cash; use the $7K to pay off bills and save $6K for future needs.

For further reading you may find this site of interest: 401(k) and Divorce (http://www.401k.org/AboutPlans/GeneralInformation/401kandDivorce/tabid/66/Default.aspx)