Can a participant use 401(k) $ to pay equity to ex spouse ?

[Guest W. Blake]

A participant is getting divorced. They are amicable and are using a mediator. They are splitting everything and are each keeping their own retirement plans.

The participant is keeping the home and will pay the exspouse the equity. The participant was wondering if they could use their 401(k) to pay this amount?

Would this count as a hardship - payment towards principal home? - I wouldn't recommend this due to taxes, penalties etc... But he wanted the option.

A loan is available to him - in this case may he exceed the 5 year payback limit?

Could he get a QDRO to pay the exspouse out of the 401(k) and use that to reduce the equity owed to her on the house?

He is just looking for options. Thanks!

[david rigby]

Somebody needs an attorney for this advice.

The employer/plan/TPA should not try to give such advice.

[Guest W. Blake]

Yes, the last option is for the mediator, but the first two really woudn't be.

Let's say he is divorced and owes his exspouse 30K against their home.

Would this fall under hardship provision of payment towards purchase of principal home?

Same with the loan?

[E as in ERISA]

Q 19 http://www.abanet.org/jceb/2004/qa04irs.pdf

[RCK]

This is a natural QDRO application.

But it could be a loan if he wanted rebuild his pretax assets and was able to actually repay it.

It does not meet any of the safe harbor hardship definitions. Ooops--E as in ERISA's response came up while I was responding. I ma surprised by that interpretation, but I stand corrected.

[E as in ERISA]

Don't forget that the retirement plan is a taxable asset. That makes it harder to use for an offset against a "nontaxable" asset. Because who will be responsible for paying the taxes? If he takes a hardship for 30,000, it will get reported as a taxable distribution. Will he take out another 6,000 to 18,000 to pay taxes on the amount? Or will he make her pay the taxes on a 30,000 QDRO distribution?

[JanetM]

If the ex spouse gets the funds from qualified plan via a qdro it is taxable to ex spouse, if they get if from the participant taking a loan it is not taxable to anyone (as long as it is paid back).

Hardship doesn't seem proper, not avoiding foreclosure or making down payment. Besides that makes it taxable with penalty to participant.

With todays low rates why not do home equity loan or something.

[Guest W. Blake]

E as in ERISA - Thank you for the link, that is what I was looking for. I do not want to encourage the hardship, but feel obligated to give the participant all of the options available to him. I think that he would have to discuss the tax liabilities with the mediator. If he uses a QDRO to offset, she would pay the taxes and if he uses the hardship, he would pay the taxes and that would all have to be taken in to consideration. To pay off the loan in 5 years would probably be difficult, so I wonder if they would allow an extended payback time since it goes towards the purchase of the principal residence???

[Guest RBlaine]

another thing to consider:

If he gets the cash as a hardship withdrawal and is under 59 1/2 he will have to pay penalty taxes. If she gets the cash as part of a QDRO and he gets full ownership of the house in the divorce decree no penalty taxes will be due. They could have the $ amount in the QDRO to cover the amount of the equity plus the taxes she will have to pay on the distribution.

If she can afford to rollover the QDRO distribution into an IRA, no taxes will be due from anyone.

[david rigby]

Well, that may be another thing for the husband and wife (and their attorneys) to consider, but it most definitely is not a consideration for the plan administrator (or TPA or anyone else associated with plan administration).