Avoiding Tax Penalties During the Process of Equitable Distribution

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In Pennsylvania, it is not uncommon for a 401(k) to be used as a bargaining chip during the equitable distribution phase of a divorce. People often think that a 401(k) is a good asset to leverage and they can use it to make division more equal. What people don’t realize, however, is there are penalties associated with 401(k) accounts. In today’s blog we’ll discuss some common issues faced during the process of equitable distribution.

When you are attempting to transfer a pension, it is important that you transfer from trustee to trustee. For example, you need to put your 401(k) into an institution then have that institution transfer it to the opposing party’s institution of choice. This will insure that it is a tax-free transfer. If the money goes straight to your ex-spouse, then they will have a very short period to get it into their own plan without being taxed very heavily.

The best method for doing this is to do a rollover of the 401(k) into the receiving spouse’s 401(k). It is important to reach out to a financial advisor or an attorney with a background in finances to help in situations like this. The amount of taxation can seriously affect the final outcome of equitable distribution.

It is also important to watch for tax penalties on other items during the equitable distribution phase. For example, let’s say husband’s lawyer presents an even split of $60,000 worth of CD’s to husband and $60,000 worth of stock for wife. If wife’s lawyer accepted, wife would not be getting an even deal. Husband’s CD’s can be deposited without being taxed, however when wife goes to sell stock, she will be taxed somewhere around $10,000 of the $60,000.

After reading this you may find yourself concerned with what’s happening in your divorce. That being said, in order to fully protect yourself you need to get in touch with an experienced Pennsylvania family law attorney, like one of our lawyers at Lisa Marie Vari & Associates. Our team of lawyers will work with you to make sure that you know what is and is not taxable and to make sure you are getting a fair deal.