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Working the financials

Old 01-06-2015, 04:33 PM
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Working the financials

I am trying to work the numbers out on paper to see which scenario works best for me. I have a few questions and assume I should call a tax advisor but thought I'd throw this out to some of you, too.

If I keep the house and let AH keep his 401K, am I responsible for ALL the capital gains taxes on the home? I won't keep it for very long because I need the equity out of it to keep me afloat for a few years. I do not see me buying a home for myself within 2 years so I think the cap gains tax lets you keep the money tax free for 2 years, right?


If I take 1/2 of his 401K, I would be subjected to penalties from the IRS so I am wondering if it's better to take the tax hit on the sale of the house than take the penalties on the retirement money?

Basically, the equity in the home and 1/2 his 401K are nearly equal in value. It's just that one is tied to the home as a property investment and the other is wrapped into retirement investments and each has it's own consequence when it comes to selling and tax liabilities/penalties.

I can write the numbers down on paper and balance it all out but I'm trying to figure out how much I lose by selling the house: there will be realtor costs, closing costs, etc and then capital gains.

Yet, with the 401K, if I need that money (which I do foresee me needing) I will lose 1/2 of it to penalties.

UGH....Just trying to get a handle on things moving forward so that I can propose a reasonable request to AH soon. I'm hoping I can get him to agree to the most suitable arrangement for all of us.
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Old 01-06-2015, 06:02 PM
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Where does the capital gains tax come into play? If you're already on the deed, can his name be taken off without you incurring capital gains? Have you owned the house for at least 2 years?

Another option could be to sell the house now, split profits and split the 401k. It could be worthwhile to take a hard look at what could change in order to keep your share of the 401k. Is it possible to split into your own account without penalties?
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Old 01-06-2015, 06:30 PM
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In regards to 401K, you are hit with an early withdrawal fee of 10%of the amount you cash out, as well as you are taxed on it at wte tax rate you fall in to once it us added to your yearly total for income. I believe if you have iwned your house for over 2 years and LIVED in it, there isn't a capital gain assessed but it has been a few years since I sold our home as well as investment property. Lastly, you need to get FIRM clarification on the ability to withdraw the 401 set aside to you. In my first divorce, I was awarded HALF of everything. Including half of annuities, 401s and pension plans that were solely in his name. Some I was able to cash out immediately and others I am able to withdraw once HE turns 67, even though they are set aside to me. If I shoukd pass before him, my account reverts back to him. Lmao. Great, isn't it?
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Old 01-06-2015, 07:14 PM
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Definitely a good idea to talk with an advisor, but values being equal, I might I opt for the house. Assuming it's a standard (not Roth) 401(k), you'll have taxes and penalties for early withdrawal plus you might not even be able to get to it until a certain age. With the house, you would likely be able to exclude the gain as outlined below (from IRS website):

"You can exclude up to $250,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if all of the following are true.

You meet the ownership test.

You meet the use test.

During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.

If you and another person owned the home jointly but file separate returns, each of you can exclude up to $250,000 of gain from the sale of your interest in the home if each of you meets the three conditions just listed.

You may be able to exclude up to $500,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if you are married and file a joint return and meet the requirements listed in the discussion of the special rules for joint returns, later, under Married Persons .

Ownership and Use Tests

To claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have:

Owned the home for at least 2 years (the ownership test), and

Lived in the home as your main home for at least 2 years (the use test).

Home transferred from spouse. If your home was transferred to you by your spouse (or former spouse if the transfer was incident to divorce), you are considered to have owned it during any period of time when your spouse owned it."
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Old 01-06-2015, 07:17 PM
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Sorry-double post.
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Old 01-06-2015, 08:14 PM
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See, that's interesting about the 401K benefits. I have a standard IRA for myself but don't have very much in there. I am familiar with the penalties assessed for prewithdrawl but wasn't aware that I might not be able to access those funds until HE reaches a specific retirement age. That fact alone changes things because I would do MUCH better to keep the house and let him keep ALL of his 401K. I can use the funds from the sale of the house much faster and invest them wiser than if I have retirement monies that I can't touch yet.

I wonder if my CPA could answer these questions. I already called a financial advisor friend of mine but he wasn't sure....ugh.
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Old 01-06-2015, 08:26 PM
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I agree with guava, I just completed a tax course last semester, and if I remember correctly what guava said is true. As long as it has been your main place of residence for the past two years, and the gain does not exceed 250,000, you should be good. The 401k for sure, if you take it now will be subject to at least a 30% cut in Taxes and Early Withdrawal. If the gain on the house is substantially more than the 401k less the 30%, I'd take the home. ###FutureCPA
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Old 01-06-2015, 08:28 PM
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And yes, your CPA would mostly likely be the go to for your issue. They are required to keep updated on laws and changes yearly.
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Old 01-06-2015, 08:48 PM
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Who owns the house? Is there debt on it? Not that debt will affect the tax treatment but obviously it affects what you end up getting.

I have a standard IRA for myself but don't have very much in there. I am familiar with the penalties assessed for prewithdrawl but wasn't aware that I might not be able to access those funds until HE reaches a specific retirement age.
I'm a CPA. Never heard of this if YOU own the IRA. Aboutdone's experience is for accounts that belonged to her ex to begin with so yeah, good call to check on this.
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Old 01-06-2015, 09:12 PM
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Originally Posted by 53500 View Post
Who owns the house? Is there debt on it? Not that debt will affect the tax treatment but obviously it affects what you end up getting.



I'm a CPA. Never heard of this if YOU own the IRA. Aboutdone's experience is for accounts that belonged to her ex to begin with so yeah, good call to check on this.
I have an IRA separate from his 401K which is held elsewhere at a different brokerage firm. I figured they would liquidate half and then I'd have it transferred to my IRA, which is not a Roth but a standard IRA.

The house is in both our names and we live in a community property state. We do have a mortgage but we have a decent amount of equity which, on paper, is equal to what I would get out of his 401K....hope that all makes sense, LOL.
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Old 01-06-2015, 11:05 PM
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Hi liztola, okay, first I have to give a couple of disclaimers:

(1) This is partially a legal issue and I am not a lawyer
(2) This is a public forum, it's not like you're my real-life client so anything I say is necessarily general.

Let's say all your assets are community property. (It is possible they are not if you had them before you married.) Then, generally, they will be split 50/50. Half of your husband's 401K would be transferred, usually by whoever holds it (Smith Barney, for example) to a different 401K account in your name. Neither of you would be taxed on this transfer.

The house: There are many ways to handle a house. You could both sell it outright and split the proceeds. One of you could transfer it to the other. Sometimes, particularly when there are minor children, both spouses retain ownership but one is allowed to live in it until the youngest child is 18. Then when it's sold, the person who lived in it gets the principal residence exclusion and the other person does not. He or she will have a capital gain or loss.

If your intent is to take the 401K money out to spend - this will be an expensive way to get it, as you know, because of the taxes and penalties. And you should still check into the kind of restriction mentioned by Aboutdone.

Guava gave a very good summary of the results of selling the house and it does not sound like are interested in continuing to live in it. Yes, you will be responsible for the taxes on the gain but there may be little or no taxable gain. That would be the first thing to figure out. Closing costs will reduce potential gain.

So if you're looking for cash in hand and believe the house will sell quickly at the price you want, then odds are selling the house will yield more after-tax dollars than splitting your retirement funds.

But definitely pencil it out and ask your CPA.

Hope this helps and good luck!
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Old 01-07-2015, 08:15 AM
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Liz - you can roll his 401k to your IRA and take distributions from it based on YOUR retirement age. It requires a QDRO agreement be created as part of the divorce proceedings.

I just did this for my mom when she divorced last year. He kept the house and split his 401K into 2 - once she was assigned a new account # with the 401k company, we submitted for a direct rollover to HER IRA held at our firm. (because she was not an active employee of the company, she was able to roll out at will, she didn't have to keep it in the 401K BUT it had to go through that step to be legal.)

He had the tax implications on his end but for her it did NOT create a tax event. Her normal distribution date (must be 59 1/2 to withdraw without penalties) is based on her age - once it rolled OUT of his 401K his age was no longer relevant.

The ONLY time I've seen the original owner's age come into play is in the case of IRA-BDA accounts, which are IRA's inherited by non-spouses. They have entirely different rules & DO require you to run calculations on the original owner's DOB.

DEFINTELY talk to a CPA & a financial planner, especially if you can consult with someone with experience in this specifically. Depending on how much CASH you are looking to create & how long you would let the funds sit in an IRA & how aggressive your portfolio is, the future growth in the IRA could be worth waiting for. What kind of advisor do you have? I work for a CFP so she has a lot of planning experience & would work WITH a client's CPA to run through scenarios - a broker typically can't really run through the long-term planning required to give advice in a situation like this.

http://www.401k.org/401k-and-divorce.php

http://www.401khelpcenter.com/401k_e...l#.VK1cIWAU_L8
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Old 01-07-2015, 08:27 AM
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Yup. I have a couple of different friends who are not allowed access to their X hubs 401k until retirement age. It stinks for sure.

Make sure you get good advise from someone who really knows what they are talking about on this.

XXX
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Old 01-07-2015, 09:53 AM
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I spoke to my CPA this AM. I don't waste any time these days, LOL. He told me that I probably should see if AH would agree to letting me keep ALL the proceeds from the sale of the house. He was thinking of coming up with some ways to help me invest the money. We talked about the financial implications if I were to take the 401K distribution and even if I invested it wisely, I am nowhere near retirement age and would have penalties and taxes to pay once I start withdrawing. He said I'd have no tax implications from the house money and we can figure out an investment plan that would work for me.

Very nice to talk to him because he was neutral and just wants to make sure I can make the most of what I get.

My lawyer had suggested this route a few months ago, too, so I'm guessing it's pretty common.

Now, all I have to do is get AH on board and see if we can work through this like adults.
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