Taxes on 401k withdrawal to IRA to SEPP
L1: Taxes on 401k withdrawal to IRA to SEPP
Hello, You Guys helped Me a lot Thanks, My question I hope is not too off topic !
My sister is getting divorced gets half her Husband 401k about 500K
I am telling her to setup a SEPP she has very little income.
She want to take it and pay off House, I think Taxes + probably 10% penalty
Not sure when its court ordered I though may be you don’t get 10% penalty
Any Thoughts, Thanks
2019-02-09 16:14, By: High Tech Red Neck, IP: [2601:588:8400:3c0:fc3f:b4ca:222d:2a6d]
L2: Taxes on 401k withdrawal to IRA to SEPP
If it is “court ordered”, then it is a QDRO (QUALIFIED DOMESTIC RELATIONS ORDER). It transfers her share of his 401-K to a 401-K into her name. She must leave it in that 401-K. Then she can take “early distributions” without the 10% penalty.
If she transfers it to an IRA, then she is subject to the 10% penalty for early distributions until she reaches 59 1/2.
Your idea of her setting up a SEPP 72-T would work, but she would be locked into the SEPP for the longer of age 59 1/2 or 60 months. You did not indicate her age.
Leaving it in a QDRO 401-K will give her complete flexibility, especially for any emergencies, while the SEPP would be an inflexible amount.
Keep in mind that any distributions from a 401-K or IRA are subject to income taxes. As a single she will be subject to 22% tax on Taxable Income of up to $ 38,700 (i.e. Gross Income of $ 50,700 – $ 12,000 Standard Deduction). (You didn’t mention if there were any kids, in which case she could file as Head of Household.)
Since this will be a 2019 divorce, any alimony will not be taxable. She might be better off with a different arrangement if the only assets are the house and her husband’s 401-K. HER divorce attorney should consider different arrangements, such as alimony (not deductible by her husband, and not taxable to her), or she gets the house in lieu of some of the 401-K, and he makes the mortgage payments. Taking taxable money from the 401-K to pay off the mortgage can be a bad idea, especially if the investments in the 401-K earn significantly more than the mortgage interest.
She needs an experienced tax or financial advisor. Most divorce attorneys are clueless about the income tax regulations !!!
2019-02-09 18:09, By: dlzallestaxes, IP: [18.104.22.168]