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Asked 7/17/2011

My wife wants to transfer money from her 401K to my 401K. Does it make good business sense

My wife does not have the money to buy me out from the refinancing of the family home. She wants to transfer money into my 401K from her 401K. Would that be wise to allow that to happen?

 
 
 
 
 
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Answer 1/4 - Submitted 7/17/2011

Can't happen.
If she wants to buy you out of the house, she can certainly take money from her 401(k). She will pay income tax, and penalty if it applies. You cannot put that money into your 401(k). At least, not directly. You could bank the money, then raise your 401(k) contributions at work as high as your employer and plan allow, until you have contributed the amount of the buyout. Use the money in the bank to make up for your now-smaller paycheck. If you don't do it this way, you will be on the books as having made excess contributions, and will be subject to a 6% over-contribution penalty.

 
 

Answer 2/4 - Submitted 7/18/2011

You cannot transfer money from one 401k to another. These are individual accounts that may only be funded in certain ways, like payroll deductions or rollovers from another qualified plan, but from an account of the same account holder, not the spouse.

Reader's suggestion is a valid one. If your spouse does give you a lump sum you can max out your contribution to pump more money into your plan over time, but depending on the amount this may take a very long time and you may have issues when annual testing is done. You see, your contributions to the play may be capped at a level that will make this a bad option for you, especially if you are considered a highly compensated employee or are an owner of the company.

I'd like for your spouse to keep the retirement money where it is so that it can continue to grow tax deferred until retirement and for you to figure out another way to get that done, but if you do get the money from the plan you will either have to use it to do something else or use it to offset a higher contribution to your plan over time.

 
 

Answer 3/4 - Submitted 7/18/2011

My former spouse got a portion of my 401k as part of our divorce property settlement. A properly executed QDRO can make this OK if for some reason she can't refinance to come up with the cash. If she's still with her employer, she may not be allowed to simply cash out under her name to pay you.

If you chose to go the QDRO route, you can have the funds put into an IRA, or you may be able to have her plan administrator split her fund in two, with you as the owner of the other half.

Here's a brief overview: http://www.401k.org/AboutPlans/GeneralInformation/ 401kandDivorce/tabid/66/Default.aspx

 
 

Answer 4/4 - Submitted 7/19/2011

IMHO's suggestion is a good one: A QDRO (qualified domestic relations order) would be the only way I know of to structure the settlement using retirement funds and not currently involve the tax man.

I get the impression that proper QDROs are not entered into casually - look for an attorney with experience in them.

 
 
 
 
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