Do you have to pay taxes on a divorce 401k settlement?


It’s bad enough you have to divide your property with your spouse at divorce. Does Uncle Sam get a piece too?

Generally, any transfer pursuant to a divorce, including 401k or other retirement money, is non-taxable. Therefore, poor Uncle Sam usually gets nothing.

If pursuant to a divorce agreement or judgement, a certain portion of a retirement account, including but not limited to a 401k, 403(b), IRA (Roth or regular) or portion of a pension is transferred from one spouse to another, there are no tax liabilities or deductions associated with the transfer.

There are a couple of things you can do to lower the risk of a tax issue. First, although this seems obvious, to ensure the event is not taxable, the transfer must be included in the divorce agreement and/or court judgment. Retirement transfers are generally included in every agreement. Make sure the details are in included: for example, which account is being divided, how much or what percentage is being transferred.

Also, whenever there’s a transfer of real estate, it’s common for the attorney drafting the deed to include on it the divorce docket number and state on the deed that the transfer is pursuant to the parties’ divorce.

Finally, although transfers of retirement money pursuant to a divorce are non-taxable events, regular tax and penalty rules do still apply to any withdrawals or payments from the plan after the transfer is complete.

For example, once a spouse receives a certain percentage of a pension pursuant to the divorce and begins to collect monthly payments, that person must pay federal and state income taxes on those payments. Similarly, if a spouse who receives a percentage of a 401k makes a withdrawal from the account, that person must pay income taxes on the amount withdrawn. And if the withdrawal is made before age 59 1/2, that person must also pay a 10% penalty on top of the taxes.

In short, 401k and other retirement transfers pursuant to a divorce are generally non-taxable. However, once the money is transferred, regular tax rules apply to payouts or withdrawals from the account.

If you have any questions about 401k transfers in divorce or any other divorce questions, feel free to contact us.