How to save tax on 401k cash-out in legal separation? 7 Answers as of October 27, 2012

Because of legally separating, I'll receive a 401k pay-out of $109,000 in 2013, as well as child & spousal support of $3300/month. My spouse's gross income will be 103,000 in 2013. How can we lower our income tax rate, and which tax status is best for us: Married filing jointly or Married filing separately?

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Donaldson Stewart, PC
Donaldson Stewart, PC | Monica H. Donaldson Stewart
I can't tell you whether to file jointly or separately (you would need to speak with a tax professional to obtain advice on this issue). Child support is not taxable, so this will not affect your filing. Spousal maintenance is taxable, so if you file separately, your husband will be able to deduct it from his taxable income and you will have to pay taxes on it as though you had earned it. On the 401k "payout," it is possible for these funds to be rolled over to you rather than "cashing out." This would be done by a document called a Qualified Domestic Relations Order (QDRO), and it results in the funds rolling over without a taxable consequence. You'd only pay taxes if you withdraw funds, not just for the transfer itself.
Answer Applies to: Arizona
Replied: 10/27/2012
The Law Office of Cathy R. Cook
The Law Office of Cathy R. Cook | Cathy R. Cook
The 401k can be transferred to an IRA without tax consequences. Lowering your overall tax liability depends on all of your deductions. You should consult a tax advisor.
Answer Applies to: Ohio
Replied: 10/26/2012
Law Office of Joan M. Canavan | Joan Canavan
I would suggest that you discuss these issues with a tax accountant rather that seek advice from an attorney.
Answer Applies to: Massachusetts
Replied: 10/26/2012
DO NOT TAKE A PAY-OUT. Set up an IRA account and have the money transferred from the 401K to your IRA. Do not let it hit your bank account. That way there shouldn't be any taxes. Have CPA run your taxes both ways to figure out what is best. When you have money available you should have an attorney to help you or you run the risk of making mistakes and losing your rights or paying more taxes.
Answer Applies to: California
Replied: 10/26/2012
John E. Kirchner, Attorney at Law
John E. Kirchner, Attorney at Law | John Kirchner
There is no tax or penalty in a divorce related withdrawal from a 401k, provided you take your share in a rollover to another qualified plan. If don't rollover, you pay taxes as ordinary income, but not the penalties for early withdrawal. You can save taxes by not withdrawing (just rollover) or only withdrawing smaller amounts spread over several years. Child support is not taxable to the payee and not deductible to the payor. Spousal support is taxable alimony to the payee and deductible to the payor, unless there is a court approved agreement for it to be nontaxable. To maximize the tax benefits, the family support amount needs to be clearly delineated as to what is child support and what is alimony. A single, lump sum amount that isn't clearly defined to indicate what is child support will be presumed by the IRS as taxable alimony.
Answer Applies to: Colorado
Replied: 10/26/2012
    John Russo | John Russo
    I think you are on the wrong site, you should be on ask you'r friendly CPA. But, since I am both I will give you a little advice since there is not enough info here to give a proper overview. First you need to role the 401 or you will get hit with the penalty, unless t falls under one of the limited exceptions, which I cannot tell by your info. Second the alimony and/or spousal support is taxable income to you, but the child support is not. As far as filing goes, do what any accountant would do, prepare two sets of returns under the different filing formats to determine the most beneficial.
    Answer Applies to: Rhode Island
    Replied: 10/26/2012
    Law Offices of Frances Headley | Frances Headley
    Married filing jointly is generally much more favorable than filing separately. You should discuss all of the ramifications with your accountant.
    Answer Applies to: California
    Replied: 10/26/2012
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