I have just filed for divorced and I will be receiving a judgement for 50% of my husbands $114,000. 401K. I know that I will end up paying a 10% penalty and 5% Mass. Penalty on the incomne and the $57,000 will be added to my income bumping me up to a higher tax rate (probably 28%). When do I pay these taxes? When I get the check or when I file my taxes in Dec. 2009?

Do you need the cash?
I would speak to a tax consultant to see how you can roll it over to an IRA or your own 401K.

The taxes should be taken out when 401K pays out, but the penalties and your years taxes will be due when you file. There is no grace period with taxes. You could make arrangements but will not be too long.

401(k) administrator will withhold taxes from 401(k) distribution or withdrawal.

For more information on 401(k), read Your U.S. Tax Return: Elective Deferrals 401(k) Plans

Kate:

AtYourService makes a valid point: you should investigate rolling over the money into your own IRA or 401K. A phone call to Charles Schwab or Fidelity and the 401K custodian should set you up with the know-how to do this.

Now, if the rollover option is NOT possible, an early distribution due to a divorce settlement is a distribution under a qualified domestic relations order (QDRO), which qualifies for an exemption from the 10% Early Withdrawal Penalty on your federal return.

More than like, Massachusetts also recognizes QDRO as a reason to waive their 5% penalty.

However, even with the exemptions, normal income taxes WILL be due for both the federal and Masssachusetts tax returns.

If you do NOT already use a tax professional to prepare your return, you NEED to use one for your 2008 return. The exemptions noted above must be applied for; they are NOT automatic, and it is NOT something to be done by an layman.

The fact of the divorce allows the account to be divided, a new account to be established in your name, and 50% to be assigned to you by court order called a qualified domestic relations order (QDRO). Once the account is in your name, you would be free to withdraw the funds in which case the money withdrawn would be treated as oridnary income and hit with a 10% penalty if you're less than 59 1/2 years old. The investment company will withhold the tax and penalty when issuing the check, and then you would factor the income and withhold when doing your taxes the following year. If you don't need the cash let the money grow in the account tax free.