A friend of mine received half of her husband's 401k in a lump sum divorce settlement. I know this is not supposed to be included in gross income and shouldn't be taxed. SHe received a 1099R with gross amount and taxable amunt the same and federal taxes withheld. She is panicing about how to file. Should she include the income and deduct the taxes (early withdrawl penalty) on the adjustment portion of the 1040, or include taxes withheld as part of taxes paid on the back? The 1099 is in her name, not her husband's.

Wolfnoe:

You are mistaken when you say that the distribution from the 401K is not taxable.

Any distribution from any retirement plan that is funded with pre-tax dollars will be taxed. The only question is whom will be taxed.

It seems likely that her ex's lawyer did his/her job and made sure the distribution was done in the wife's name so that she would be liable for the income taxes. That's the bad news and there is nothing to be done about it. Sorry!

The good news is that she should not be liable for the 10% early withdrawal penalty. This distribution is due to the divorce (or, in tax terms, a "qualified domestic relation order") and therefore qualifies for an exception to the 10% penalty. She will need to report the income on Line 16a and 16b, then complete Form 5329 to request the exception. She may want to get professional help to do this.

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Originally Posted by AtlantaTaxExpert

Wolfnoe:

You are mistaken when you say that the distribution from the 401K is not taxable.

Any distribution from any retirement plan that is funded with pre-tax dollars will be taxed. The only question is whom will be taxed.

It seems likely that her ex's lawyer did his/her job and made sure the distribution was done in the wife's name so that she would be liable for the income taxes. That's the bad news and there is nothing to be done about it. Sorry!

The good news is that she should not be liable for the 10% early withdrawal penalty. This distribution is due to the divorce (or, in tax terms, a "qualified domestic relation order") and therefore qualifies for an exception to the 10% penalty. She will need to report the income on Line 16a and 16b, then complete Form 5329 to request the exception. She may want to get professional help to do this.

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100 percent correct, funds from the retirement plan is taxable when it is taken out ( normally they will withhold taxes out when you get the funds)
You will show this in your filing as income and the taxes paid out as paid taxes.

Sorry who ever told you that it was not taxable was wrong. The money and interest is not taxable until it is withdrawn.