[daveonly]

I am considering applying for a hardship disbursement of my 401k funds to be used as a cash settlement for my divorce. Do I pay taxes on this, does my wife or do both of us pay?

[stevetcg]

You are getting the money (regardless if you are giving it away) so you pay the taxes.

[cadillac59]

I am considering applying for a hardship disbursement of my 401k funds to be used as a cash settlement for my divorce. Do I pay taxes on this, does my wife or do both of us pay?

You both should pay the taxes if it's marital (community) property. That, assuming there is no other agreement to the contrary. But hold the phone. Why are you paying an equalizing payment out of a 401(k)? You NEVER want to do that as some kind of cash withdrawal that will trigger taxes and penalties. Just propose a division of the account sufficient to fund the equalizing payment with a QDRO. Her share gets rolled over into an IRA. No taxes for you, no penalties. She avoids the penalties and can access the funds after she pays the taxes on the share she gets. If you owe her a certain net, then simply "gross-up" (as we call it) the amount you are paying her to cover the taxes. It's easier that way.

You need some legal advice on this because it sounds like you are going about this in the WRONG way. Don't make a costly mistake.

[TGMcCallie]

As a tax professional, if you take a distribution from your 401K before you reach the retirement age set by your company then you will have to pay taxes and penalty for early distribution.

It is almost certain that the judge will award 50% of your 401K to your wife unless she is a total very bad woman, even in that case they do especially if there arechildren involved.

If judge does this then her 1/2 is her tax liability unless she rolls it over into another retirement plan within 60 days. You will not have to pay any taxes or penalty of what judge gives her.

Why don't you make a loan against your 401K? That way no taxes or penalty involved.;

A divorce is not a hardship under 401k or IRA rules.

[cdad]

As a tax professional, if you take a distribution from your 401K before you reach the retirement age set by your company then you will have to pay taxes and penalty for early distribution.

It is almost certain that the judge will award 50% of your 401K to your wife unless she is a total very bad woman, even in that case they do especially if there arechildren involved.

If judge does this then her 1/2 is her tax liability unless she rolls it over into another retirement plan within 60 days. You will not have to pay any taxes or penalty of what judge gives her.

Why don't you make a loan against your 401K? That way no taxes or penalty involved.;

A divorce is not a hardship under 401k or IRA rules.

Careful when you say how certain you are of a distribution when it comes to divorce. There are so many variables and in this case there is not enough information to go on to make any kind of statement like that. Just be aware that the laws vary so much between states and also when the contributions started vs the length of marriage its all up in the air until its in front of a judge and settled.

[ScottGem]

401(k)s are treated a bit differently in a divorce. This article gives a brief explanation.

How divorce hits your 401(k) - MSN Money

I suggest doing more research on QDROs.

[TGMcCallie]

All and good BUT the IRS rules superceed any court rulings in a divorce.

[ScottGem]

all and good BUT the IRS rules superceed any court rulings in a divorce.

But QDROs are PART of the IRS rules and recognized by the IRS. See:
FAQs About Qualified Domestic Relations Orders

I'm surprised that "as a tax professional", you are not aware of QDROs.

[TGMcCallie]

I am familiar with qualified domestic relations orders. What I said or meant to imply that any order from state/county court that is contrary to IRS rules will be overruled by IRS.

[TGMcCallie]

Quote from IRS Publication 17 concerning my statement about rollover and taxes on retirement distributions in relation to divorce.

You may be able to roll over tax free all of part of a distribvution from a qualified retirement plan that you receive under a QDRO. If you receive the distribution as a employee's spouse or former spouse (not as a nonspousal beneficiary), the rollover rules apply to you AS IF YOU WERE THE EMPLOYEE. You can roll over the diwstribution from the plan into a traditional IRA or to another eligible retirement plan.

Unquote/

So she pays taxex and penalty (according to the plan) if she chooses not to roll it over or open up a qualified retirement plan within 60 days.