12 May What are the tax consequences of this divorce settlement?

Q. I’m in the process of a divorce. My wife is buying me out for my equity in the residence for $250,000 from her company 401(k) plan. I need the money to put a down payment on a house without incurring taxes on the money. Can I get a check as part of a divorce exemption on taxes or can my wife do a direct rollover into my IRA and then I could withdraw the money to use for a down payment without incurring the 10 percent penalty and income taxes?
— Unsure

A. We understand that you want to be able to afford a home without paying taxes or penalties, but it’s not that simple.

It also may not be the smartest financial strategy.

By accepting money from your wife’s 401(k) in exchange for your share of the house, you are turning a tax-free asset and probably tax-free income on the sale into a taxable asset, said Michael Karu, a certified public accountant with Levine, Jacobs & Co. in Livingston.

You should work very carefully with your attorney and with a tax expert to make sure you understand the consequences of whatever happens with your settlement.

“While the transfer — assuming they use a properly executed Qualified Domestic Relations Order (QDRO) — will not be taxable, the withdrawal will be,” Karu said. “That is regardless of whether it’s withdrawn from the 401(k) or rolled into an IRA and then withdrawn.”

“The 10% penalty is statutory,” he said.

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This story was originally published on May 12, 2021.

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