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jjnj · Sep 23, 2008, 04:20 PM

Working through mediation in divorce process in NJ. In order to figure out equitable distribution, does anyone know how an old 401k withdrawal made shortly after marriage to pay for a primary residence play into the equation?

Is it even considered; is the whole amount or just the net used toward the house considered(post tax and penalty); is there a present value adjustment or anything?

I can't find this information anywhere; I just need to know if there is precedence so I can use that in my calculations.

This is really dragging out the process and my attorney won't give me a straight answer.

ebaines · Sep 24, 2008, 02:11 PM

In figuring how to split the value of the house you would first "pay back" the down payment(s) to whomever contributed from the asssets they brought into the marriage, then split the remaining appreciation (if any). The 401(k) withdrawal would be considered as a contribution to the downpayment by that person. Just as if that person sold some personal property, like stock or bonds, for the down payment.

I would think in this you value only the net amount, not pre tax and penalty. Reason is that the actual value you have in your 401(k) is reduced by the taxes that are owed and must eventually be paid. For example, if your 401(k) account balance is $100, and you are in a 20% tax bracket, it's actual value to you is only $80. There's no way to ever avoid having to pay that 20%. Perhaps the 10% penalty should be considered as an expense, and like other expenses you incur in the marriage doesn't really affect the split of assets.

jjnj · Sep 29, 2008, 05:07 PM

Thanks for the information; to go one better if I have the closing papers from the purchase showing the portion of the 401k withdrawal that actually was applied to the down payment, I should be able to use that number as the payback amount? I know we took out extra from the 401k to be prepared for the tax and penalty. To take it a step further, the down payment from the 401k was for our first house, which when we sold, tha amount we got back from the sale was less than the down deposit from the 401k (we took a loss). That money from the sale of our first house was put toward the down deposit on the house now being split. So can that be the amount that can be considered as the payback before splitting the house?

ebaines · Sep 30, 2008, 06:16 AM

This is why lawyers make so much money...

It seems to me that there are two possible arguments, so depending on what you want the answer to be you would argue one of the following:

A. The original down payment was brought into the marriage, and hence when the marriage breaks up the party that contributed the down payment should get it back, or

B. The value of the original down payment was diminished by the housing downturn, so the amount to be returned to the party that contributed it should be reduced by the proportion of the loss on the sale of the first and second houses. For example, if the first house sold for 90% of its purchase price, and the second house sells for 95% of its purchase price, the amount of the original down payment to be returned would be 90%*95%.

Personally I believe option B is the most equitable, but I'm no lawyer...