$43,000 QDRO or Loan?

[kwalified]

Soon to be divorced small plan participant (HCE) had a QDRO drawn up where he was to issue a check to his soon to be ex for $43K. Now her attorney is not agreeing to the terms as the atty is reasoning that the ex will have to pay tax on the QDRO and the atty wants their fee to be paid as well from the distribution.

The participant is now considering taking a loan from the plan to pay off his ex and repay the loan over 5 years. I explained he would be essentially taxed twice in doing so. His account is in money market right now, so he is essentially earning very little to none, so missing earnings on the loan amount would not be an issue, however he would not be able to defer the max like he has been doing.

Would a loan even be an option in this instance? The plan would be amended to allow for loans.

[QDROphile]

A loan might be the best economic option, but I wonder about the ability to evaluate the economics if some of the advice refers to double taxation when referring to loans. Try an analysis with a lender other than the plan.

[CADMT]

First, the use of an ERISA plan funds to pay debts (including attorney fees) is prohibited (anti alienation provision). Second, if he takes a loan to satisfy the marital property, the tax consequence to him are nil, since it is a loan not a distribution. He should not care about the tax consequence to her, that's her problem. If his ROI is very low, the loan may be the more attractive option. If he takes a distribution (and not a loan) there would be tax consequences to him. A QDRO is only necessary to divide assets in a plan. If he is to issue a check to her as her share of a marital asset, a simple court order is all that is required, and could be a part of the JOD or settlement agreement. Lastly, if he borrows the money, he will at least be paying himself back with interest. Sort of like a savings account. It's better than borrowing from someone else. Sometimes a loan from a retirement plan is a good idea.

[ESOP Guy]

I would point out the Alt Payee would only pay taxes on the QDRO if she doesn't put the money in an IRA. Also, if she takes the money and pays the taxes if I recall correctly (doing this from memory so feel free to correct me) and the Alt Payee is <59.5 there is no 10% tax. It is simple income tax. I would add everything is negotioable. The participant is willing they can adjust the amount fo the QDRO to make the net payment the amount they want. I don't see that as being fair but if both parties agree then who am I to say differently.

Lastly, if you think loans cause people to be taxed twice use the search function and read the many threads on it. I simply disagree that they cause people to be taxed twice but I no longer wish to spend energy discussing why any more. The issue should have been put to rest decades ago.

[kwalified]

Thank you for the comments.

With a loan from a plan you are paying pre tax dollars back with after tax money, hence the taxed twice argument. Of course the second time is when the distribution ultimately occurs.

[QDROphile]

You are not going to change the views of the critics of your analysis that this amounts to double taxation, so don't bother with the distraction to your inquiry. You either get it or you don't and you will either get a good economic evaluation of your options or you won't. References to double taxation will onlly confuse and distort the discussion.

[masteff]

A question would be whether the ex wife is getting the $43K because a) she's entitled to 1/2 of the marital portion of his retirement account or b) they're using it as available funds to finance a division of property (for example, he's keeping the house so she's getting money).

If the intention is a), then, in my opinion,it's 100% correct that she should be the one who has to pay the taxes (now or in the future) on her portion of the retirement account. She wants 1/2 of a tax-deferred asset without owing the deferred tax.

If the intention is b), then the question is whether they allowed for the income tax effect in determining the $43K in the first place. For example, if she was supposed to get $35K but they added $8K for taxes, it would be double dipping if she makes him pay the tax now.

[Bird]

Ditto to what masteff said. In a way, none of this is our/your problem; they need to just figure out what they want and then just do it.

[BG5150]

To save the OP time, here are a few discussions on the mythical double-taxation on loans:

http://benefitslink.com/boards/index.php?/topic/46277-double-taxation-on-loan-repayment/?hl=%2Bloan+%2Btaxed+%2Btwice

http://benefitslink.com/boards/index.php?/topic/49323-discussion-on-loan-payments-and-double-taxation/?hl=%2Bloan+%2Btaxed+%2Btwice

http://benefitslink.com/boards/index.php?/topic/16641-401k-loansdouble-taxation-or-not/

[kwalified]

A question would be whether the ex wife is getting the $43K because a) she's entitled to 1/2 of the marital portion of his retirement account or b) they're using it as available funds to finance a division of property (for example, he's keeping the house so she's getting money).

If the intention is a), then, in my opinion,it's 100% correct that she should be the one who has to pay the taxes (now or in the future) on her portion of the retirement account. She wants 1/2 of a tax-deferred asset without owing the deferred tax.

If the intention is b), then the question is whether they allowed for the income tax effect in determining the $43K in the first place. For example, if she was supposed to get $35K but they added $8K for taxes, it would be double dipping if she makes him pay the tax now.

answer is B. Although I have not heard back from the participant. Maybe they reconciled