Divorce Issues

Today TaxMama hears from Tammy in Texas who tells us, “I got divorced last October. The QDRO account is still in the process of changing over. We split the assets and debts even though I did not have a job. I am trying to pay bills and am unable to pay on the debts from the marriage. Is there a way I can cash the QDRO when it is ready without any tax penalties?”

Tammy is not alone. This spring, I am getting many, many queries from women who want to cash in their QDROs (Qualified Domestic Relations Order http://www.divorceinfo.com/qdro.htm designed to split 401 (k)s or other retirement accounts tax-free) in order to pay off the heavy debt they’ve been left with during a divorce.
http://www.dol.gov/ebsa/faqs/faq_qdro.html
http://www.divorcenet.com/states/nationwide/qdro-faq
http://www.divorcenet.com/states/new_jersey/qdro_overview

This is for all women in the process of a divorce.

First of all, do your best to get at least one liquid asset – something you can draw money from without paying tax.

Second, look at the asset split intelligently. Too often, the assets are split evenly, dollarwise. But tax-wise, you might find yourself getting stuck with a much larger tax burden.

Three, always aim for alimony for at least two years so you have time to get back into the job force, or time to cash out the home and pay off your bills.

But, for those of you who’ve already finalized your divorce, and the only asset you got was the house and the QDRO, it’s time to get smart. See if there’s another way to pay bills than to use the pension.

Sure, you may draw the money out from the account. But every dollar you take out will be taxable income. The main benefit of the QDRO is that you avoid the early withdrawal penalties when you draw the money. But it’s still all taxable. So, if you’re only using some of it to live on, you’ll be fine. Your tax bill will be reasonable. But if you take the whole thing to pay off your bills, you’ll get stuck with another huge debt – to IRS! And I’d rather owe a credit card company any day, than IRS!

If you have a home, get a mortgage to pay off those bills. And take out enough money to help you cover the mortgage payments, too, until you get on your feet. Or call all your creditors and tell them you need to put your payments on hold for a month or two until you get a job.

But, DON’T draw the money from the QDRO account. It will be the most expensive money you ever use! You’ll hate yourself if you do.

This is the time to calm down and think. Don’t let the pressure of the bills weigh you down. This is when you find out just how strong you are. YOU take control. Not the fear. Take good care of yourself. And get a really good tax professional in your corner – during your divorce.

Remember, you’ll find answers to questions about divorce and all kinds of tax issues, free. Where? Where else? At TaxMama.com

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