Spending Money from a Defined Contribution Plan without the 10% penalty

Thanks to John James, www.specialsolutions.org

Special Solutions was founded by John James to assist families with special needs family members as they seek to provide for the future. As a Licensed Advocate for Protected Tomorrows®, John is uniquely prepared to guide families in developing a life plan for the family member.

Normally, distributions made before the participant attains age 59-1/2 are called “early distributions,” and are subject to a 10% penalty tax. The tax does not apply to early distributions upon death, disability, annuity payments for the life expectancy of the individual, or distributions made to an ex-spouse by a QDRO.

The tax Reg (72)(t)(2)(C) states that when you take money out of a qualified plan in accordance with a written divorce instrument (a QDRO), the recipient can spend any or all of it without paying the 10% penalty.

Let’s take a look at what happens when the ex-spouse receives the 401(k) asset. There are some specific rules to be aware of. Here’s an example.

Sarah was married to an airline pilot who was nearing retirement. They were both age 55. There was $640,000 in his 401(k) and the retirement plan was prepared to transfer $320,000 to her IRA.

She could transfer the money to an IRA and pay no taxes on this amount until she withdraws funds from the IRA. But Sarah’s attorney’s fees were $60,000 and she needed another $20,000 to fix her roof. She said, “I need $80,000.” Because the 401(k) withholds 20% to apply toward taxes on a withdrawal, Sarah asked for $100,000. After the 20% withholding, she had $80,000 in cash and $220,000 to transfer to her IRA. She was able to spend the $80,000 without incurring a 10% penalty on the $100,000, which saved her $10,000 in penalties.

After the money from a pension plan goes into an IRA, which is not considered a qualified plan, Sarah is held to the early withdrawal rule. If she says, “Oh I forgot, I need another $5,000 to buy a car,” it is too late. She will have to pay the 10% penalty and the taxes on that money.

It is important to understand the difference between rolling over money from a qualified plan and transferring money from a qualified plan. The Unemployment Compensation Amendment Act (UCA), which took effect in January 1993, stated that any monies taken out of a qualified plan or tax-sheltered annuity would be subject to 20% withholding. This rule does not apply to IRAs or SEPs.

In other words, if money is transferred from a qualified plan to an IRA, the check is sent directly from the qualified plan to the IRA. In a rollover, the funds are paid to the person who then remits the money to an IRA. A payment to the person, whether or not there is a rollover, is subject to the 20% withholding. Only a direct transfer avoids the withholding tax.

This is a great planning tool when clients have a need for cash and there is no other way to get it.

10 Simple Communication Strategies for Divorced Parents

10 Simple Communication Strategies for Divorced Parents

Courtesy of Rosalind Sedacca. Her site provides good information for divorcing parents. http://www.childcentereddivorce.com.

by Cindy Harari, Esq.

Cindy Harari, Esq. is my guest contributor this week. She offers valuable information about communicating with your ex that is effective and promotes healthy parenting relationships. My thanks for Cindy for her excellent advice. Rosalind Sedacca

One of many challenges faced by divorced parents is the dilemma of communicating with their child's other parent. Although the parents have decided to divorce and end their "personal" relationship, when children are involved, the dissolution of a marriage mirrors the end of a business relationship where the business partners (the parents) have produced a product or asset (the children) that remains after the termination of the business.

Even though the parents no longer wish to continue to "work together," they share the desire for their children (the priceless marital asset) to grow and thrive. Among other things, the success of the children requires divorced parents to communicate with each other about child-focused issues. So how do divorced parents communicate effectively about their children when they are angry or upset or would simply rather not speak with their child's other parent ever again? Read on...

1. Whenever possible, communicate in writing. Writing gives you the opportunity to clarify your thoughts and express yourself clearly. Also, in the event of a misunderstanding, everyone can go back and look at what is written. E-mails and faxes have the advantage of having a date and time embedded as well.

2. Stick to child-focused issues and keep your communication informative, not emotional.

3. Keep your communication clear. Use bullet points or numbers rather than paragraphs.

4. If an item requires a response, indicate when the response is necessary. Also state what action will be taken in the event the other parent does not respond. For example: Our son's class trip is on (date) and the cost is ($X). The permission slip is due on (date). Please let me know by (date) if this is OK with you. If I don't hear from you, I will sign the permission slip and you and I will split the cost.

5. Do not use your communication as an opportunity to re-hash your feelings about the subjects you are writing about. Remember - this is business communication about your children.

6. Divide your writing into sections such as "old business," "new business" and "FYI."

7. Respond to communication from your child's other parent as you would like to have them respond to you. Be prompt and businesslike.

8. Use e-mail (and all written communication) courteously. Do not write entirely in capital letters. Do not use boldface type. Do not use extremely large type. Do not use exclamation points. Stay away from sarcasm. No name-calling or bad language at any time.

9. Take the initiative so neither parent becomes the "communication liaison." Children's schools, day care providers, extracurricular activity providers, etc. should have contact information for both parents. Each parent should receive notices from these sources. If that is not happening, the parent who is not receiving the information can provide their contact information and get on the distribution list.

10. Look into online programs such as OurFamilyWizard and ShareKids for calendaring and communication. These programs are designed especially for divorced parents.

There is a time and a place for your emotional release regarding your divorce, but, at the same time, there is a need to conduct the business of raising your children with someone you would probably rather not talk to. So how do you find the strength to "take the high road" time after time and communicate calmly and effectively with your child's other parent?

Always remember that your child's wellbeing depends on what you do and how you do it. It takes work to compartmentalize your emotions and put the needs of your children first, but you can do it. You are not alone - there are many resources available for to help you grow through the divorce. Successful communication strategies are a great addition to your post-divorce parenting toolkit.

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Cindy Harari, Esq. is an attorney, trained parenting coordinator, mediator, and arbitrator. Her professional training combined with years of practical experience gives Ms. Harari a unique perspective and distinctive insight regarding issues of divorce and parenting. For additional information, please visit www.solutionsnottalk.com. © 2008. Cindy Harari. All Rights Reserved.

Rosalind Sedacca, CCT is a relationship seminar facilitator and author of the new ebook, How Do I Tell the Kids ... about the Divorce? A Create-a-Storybook Guide to Preparing Your Children -- with Love! The book provides fill-in-the-blank templates for customizing a personal family storybook that guides children through this difficult transition with optimum results. For more information about the book, Rosalind's free articles and free ezine visit http://www.childcentereddivorce.com.

© Rosalind Sedacca 2008. All rights reserved.