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Carol Ann Wilson, Certified
Financial Planner, is a recognized specialist in marital
financial issues and a pioneer in the field of divorce
financial planning. Her pre-divorce financial consulting
company, Quantum Financial, Inc. has been in business since
1985. In 1993 she founded the Institute for Certified Divorce
Planners and in 2002 she founded the College for Divorce
Specialists to train attorneys, CPAs and financial professionals
in the financial issues in divorce. She is now the president
of the Financial Divorce Association. She designed software
which is widely used by lawyers and financial planners
to calculate the financial result of divorce settlements.
She has also served as an expert witness in court in over
100 divorce cases nationwide.
Carol Ann is the author of The
Financial Guide to Divorce Settlement, and 40
Tips for Surviving Your Divorce. She
is the co-author of The Survival Manual for Women in
Divorce, The Survival Manual for Men in Divorce, ABCs of
Divorce
for Women and The Dollars and Sense of Divorce.
She frequently serves as a speaker and faculty member
of high-ranking legal and financial organizations and has
been published in many professional journals.
She has appeared on the Regis Philbin Show, Geraldo, LifeTime
Live, CNBC Financial News and numerous radio programs.
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Introduction:
It
has been said that divorce lawyers have the highest number
of malpractice claims. One reason may be that
while advising their clients on settlement issues, the lawyer
may be giving improper financial advice. This is commonly due
to the constant changes in tax law and perhaps the fact that
the divorce lawyer’s expertise is in the law, not in taxes.
This column will address some of the most common financial issues
that divorce lawyers face with their clients.
Tip of the Month:
Spending Money from a Defined Contribution Plan without the 10%
penalty.
Normally, distributions made before the participant
attains age 59-1/2 are called "early distributions," and
are subject to a 10% penalty tax. The tax does not apply to early
distributions upon death, disability, annuity payments for the
life expectancy of the individual, or distributions made to an
ex-spouse by a QDRO.
The tax Reg (72)(t)(2)(C) states that when you take money out
of a qualified plan in accordance with a written divorce instrument
(a QDRO), the recipient can spend any or all of it without paying
the 10% penalty.
Let’s take a look at what happens when the ex-spouse receives
the 401(k) asset. There are some specific rules to be aware of.
Here’s an example.
Sarah was married to an airline pilot who was nearing retirement.
They were both age 55. There was $640,000 in his 401(k) and the
retirement plan was prepared to transfer $320,000 to her IRA.
She could transfer the money to an IRA and pay no taxes on this
amount until she withdraws funds from the IRA. But Sarah’s attorney’s fees were
$60,000 and she needed another $20,000 to fix her roof. She said, "I
need $80,000." Because the 401(k) withholds 20% to apply toward taxes
on a withdrawal, Sarah asked for $100,000. After the 20% withholding, she had
$80,000 in cash and $220,000 to transfer to her IRA. She was able to spend
the $80,000 without incurring a 10% penalty on the $100,000, which saved her
$10,000 in penalties.
After the money from a pension plan goes into
an IRA, which is not considered a qualified plan, Sarah is
held to the early
withdrawal rule. If she says, "Oh I forgot, I need another
$5,000 to buy a car," it is too late. She will have to
pay the 10% penalty and the taxes on that money.
It is important to understand the difference between rolling
over money from a qualified plan and transferring money from
a qualified plan. The Unemployment Compensation Amendment Act
(UCA), which took effect in January 1993, stated that any monies
taken out of a qualified plan or tax-sheltered annuity would
be subject to 20% withholding. This rule does not apply to IRAs
or SEPs.
In other words, if money is transferred from a qualified plan
to an IRA, the check is sent directly from the qualified plan
to the IRA. In a rollover, the funds are paid to the person who
then remits the money to an IRA. A payment to the person, whether
or not there is a rollover, is subject to the 20% withholding.
Only a direct transfer avoids the withholding tax.
This is a great planning tool when clients have a need for cash
and there is no other way to get it.
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