Let’s face it, experiencing a Divorce Life transition can be challenging enough when it comes to dividing up possessions and agreeing on custody of children, let alone splitting retirement assets.
Understanding the options available to receive 401(k) divorce distribution monies owed to you after a divorce is important. Factors such as your age, post-divorce tax brackets (that can sometimes drop considerably), lifestyle income needs and more will help you know which way to move forward. If the process of distribution of any 401(k) monies is not handled properly, there can be a steep price to pay in penalties and taxes.
Avoid taxes and penalties – by receiving 401(k) divorce distributions through direct transfers.
If you are financially secure following your divorce, then rolling assets over into your own qualified retirement plan through a direct transfer may be best. This approach avoids you having to pay a penalty on the 401(k) distribution money received.
Your age matters – the benefit of deferring your 401(k) divorce distributions until later.
Another option is to defer taking a distribution until the account owner retires. After he/she retires, you could either elect to take regular payments or receive a lump sum. Note, that if you do decide to leave the money in the plan, you’ll have to begin taking required minimum distributions starting at age 70 1/2 to avoid a penalty.
What are your lifestyle income needs? Cashing out your portion of the 401(k) balance comes with penalties.
Perhaps you could use some extra income to offset any financial strains of your divorce? Cashing out gives you the quickest and easiest access to the money. Beware though, as this approach can be costly. If you haven’t reached age 59 1/2 at the time of the distribution payout, you might have to pay income taxes on it along with a 10% early withdrawal penalty.
Moving forward financially following your divorce.
While a divorce transition is no matter to be taken lightly, there is some light at the end of the tunnel for spouses depending on income from 401(k) retirement assets. To gain a clear understanding of all your options, we recommend consulting with a CDFA (Certified Divorce Financial Analyst) Advisor.
Engaging a CDFA Advisor to help you understand your options.
CDFA Advisors learn and understand how to help their clients manage any retirement assets and pensions among many other issues they are faced with.
Because divorce can happen at any stage of life, the CDFA Advisors here at Second Opinion Partners can help you to start fresh. In order to put your financial picture back together and meet new goals moving forward.