Archive for Sunday, April 29, 2001

Husband stung by 401(k) loss

April 29, 2001


Q: When my wife and I divorced nearly two years ago, the cash value of my 401(k) was $350,000. Based on my lawyer's advice, I agreed that my wife would receive a flat $175,000 from my plan when we divorced.

My lawyer told me that by giving her a specific sum, she would not be entitled to any of the appreciation on her share of my 401(k) between the time of our agreement and the time the court signed an order transferring the money to her.

Although my lawyer assured me it would not take long to get this accomplished, the lawyers have still not completed the paperwork. I have heard every excuse in the book, but my real problem is that with the drop in the stock market, my 401(k) has lost more than 70 percent of its value.

In other words, I don't have $175,000 to give my ex-wife.

Is there a way to change what I pay her so she can share the losses that took place because of reasons beyond my control?

A: We don't think a court will change what occurred two years ago under these circumstances. And why should she be required to share in your losses?

You were both represented by attorneys when you entered into a business deal. You agreed to pay her a specific lump sum so that she would not share in the upside if the stock market went up between the day of your agreement and the day the funds were transferred to her. So, under the terms of the agreement and order you describe, she should not be obligated to share in the losses created by a stock market downturn.

In addition, we cannot fathom why lawyers would wait more than two years after a divorce to prepare a qualified domestic relations order. Had the order been prepared in a timely fashion, your former wife would have received her $175,000, and she would have been responsible for the market risk.

And, had the lawyers prepared the order promptly, the appreciation issue would have been negligible.

Although hindsight is 20-20, we believe it was foolish not to award your former wife half of the fund balance on the date of actual payment. By promising a specific sum, you became her guarantor. Not real smart.

At the time of our divorce, the court ordered that I receive half of my husband's 401(k) plan. Is this money subject to the 20 percent tax withholding rule? In other words, do I get the entire amount to put into my IRA account or do I get 80 percent from the trustee of the plan after taxes are withheld?

Also, I have been told by my bank that I have to wait until I receive the funds from my husband's plan to open an IRA. How can this be handled? The lawyers don't seem to know.

It is incredible that lawyers who practice in the matrimonial area do not know that the purpose of a qualified domestic relations order is to allow the tax-free transfer of funds from a qualified plan to an IRA.

By preparing an order that complies with the requirements of the trustee of your husband's plan, your share of those funds can be transferred to your IRA. The order should require that the check be made payable to "XYZ Bank for the benefit of (your name)". Then all you have to do is take the check to your bank and deposit it into your IRA account.

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