February 2009 Newsletter
Divorcing Couples Can Avoid the 10% Penalty on Retirement Fund
Early Withdrawal
Often when couples divorce, there is a retirement fund that needs
to be split. This can be an excellent source of money for a down
payment on another house. However, normally these funds are subject
to a 10% penalty tax by the IRS for "early distributions",
if the funds are disbursed before the participant is 59 1/2 years
old.
In a divorce situation, there is often the opportunity to withdraw
money and avoid the 10% penalty. Let's say that Sarah and John are
getting divorced, and Sarah is getting half of John's 401k which
is worth $640,000. Sarah's half is worth $320,000. If Sarah needs
to take $100,000 in cash for a down payment on a house, there is
a special rule for divorcing people that enables her to take cash
without having to pay the 10% penalty. In Sarah's case, it saved
her $10,000 in penalty fees!
A Certified
Real Estate Divorce Specialist or a Certified
Financial Divorce Practitioner can help your client discover
exactly how to take advantage of this opportunity. However, it is
important to know that this opportunity to avoid the 10% penalty
tax is only available before the money is transferred to
another account, so your divorcing client needs to be aware of the
opportunity before it is too late.
If there are no other assets and your divorcing client wants a
down payment for a house, this is a good source of funds to know
about.
Splitting Real Estate Property
Splitting real estate property in a divorce has many complications.
One couple owned a retail business. They both worked in it together
so it was difficult to make the decision about who was going to
get to keep the business. The value of the business was about equal
in value to the value of the building. They finally decided that
the husband would keep the business and the wife would own the building.
This decision resulted in the wife becoming the husband's landlord!
Then came issues with making repairs in the building, which caused
her to raise the rent to help pay for the repairs. This infuriated
the husband. He retaliated by moving the business out of the building
to another location. The wife was stuck with an empty building and
no incoming rent payments to pay for the repairs.
Let's suppose the wife came to you for advice about becoming a
landlord. In hindsight, if the wife were your client, would you
have thought it was a good decision for her to keep the building?
I know, it's impossible to answer that question without seeing the
numbers.
We have a teleclass recording that shows you how to analyze that
type of situation in detail. The teleclass, Splitting
Rental Properties in Divorce is lead by Gail Heinzman, CPA.
She discusses a case study of a divorcing couple that has to decide
how to split the four rental properties they own. Although the teleclass
is designed for financial planners, Real Estate Divorce Specialists
will definitely find the recording full of useful information.
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