'I used my 401(k) for life expenses because doctors found a parasite behind my husband's eye'
I am 61 and he is 51. In 2006, I left a job and used my 401(k) to pay off all of our debts. A couple of years later, he applied for and got a credit card in his name to buy an anniversary gift of a three-stone diamond ring for me. And we started building debt again.
In 2012, I quit work because I became disabled. He was in favor of me quitting for my health. I used my 401(k) for life expenses because doctors found a parasite behind my husband's eye. He was off work for a month. I sold my Jeep to pay our expenses.
Six months after quitting work I qualified for Social Security Disability Insurance. With SSDI I got only $500 less than when I was working. Last year, I sold another Jeep so we could pay off all our debt. As of next month, we only have our mortgage and his car payment.
And now? We are getting divorced. In March, we were married for 20 years. Am I entitled to half of his 401(k), which is currently valued at $275,000? How would that withdrawal work? He wants to give me his 401(k) in exchange for our house, which is worth $250,000.
What do you think? He thinks I could use the money from his 401(k) to either buy a house or use some as a down payment. Is he trying to bamboozle me?
Soon-to-be-Divorced in Wisconsin
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Dear Soon,
I have a question for you. Why doesn't your husband use the money from his 401(k) to either buy a house or use it as a downpayment? As a general rule of thumb, people don't make grand gestures in a divorce unless it benefits them - and I'm just going to go out on a limb here - more than it benefits you.
Wisconsin, as you probably know, is a community-property state so all assets contributed during the marriage are community property and, as such, would be divided 50/50 in a divorce. So any contributions made to his 401(k) over the last 20 years would be deemed community property and, I assume, were his peak earning years.
You should already receive 50% of those contributions because that's the law in your state, and you deserve them because you liquidated your own 401(k) to pay for debts that were due, at least in part, to your husband's illness. You did a good thing. Now, it's time for him to return the favor, even if he does so unwillingly.
Don't take my word for it - talk to your attorney and CPA. But since you asked: If you took your husband's entire $275,000 401(k), you would have to pay income taxes on your withdrawals, so the divorce settlement should take that into account. If you gave him the house, he would walk away with a $250,000 asset that will, presumably, continue to increase in value.
Tax obligations of 401(k)s
"When dividing retirement assets, the court is obligated to consider the tax implications to both parties," according to Karp Iancu, a law firm with offices across Wisconsin. "It is the 'industry standard' in Wisconsin family courts, to discount the present value of retirement accounts (with the exception of ROTH IRAs) by 20%."
"Dividing a 401(k) in a divorce is also a bit like dividing a pension and a bit like dividing an IRA," the firm adds. "Like pensions, the account can only be divided with a special court order called a qualified domestic relations order. But like IRAs, they can be easily valued by simply looking at the balance on a current account statement."
From your letter, you both contributed to a lifestyle where you were living above your means. And, yes, people often get into debt because, try as they might, they cannot make ends meet without putting some expenses on a credit card. Now that you are planning to live apart, you will get to see who is most able to live within their means.
About that credit card: Should your husband have taken out a credit card for a three-stone diamond engagement ring after you cashed out your 401(k) before you were 59 1/2 and incurred a 10% early-distribution penalty? No. You both need to take accountability for that. Was that the real/only reason he took out a credit card? Probably not.
If he continues to make risky financial decisions based on "want" rather than "need," your divorce will not spell the end to his financial near-misses.
Previous columns by Quentin Fottrell:
My father 'deliberately and hurtfully' cut my late sister's two kids out of his will. How can I ensure they get their fair share?
'They left nothing except junk': My brother emptied our father's house. It stands empty years after his passing. What can be done?
'My brother and sister are villains': My siblings took control of my late mother's estate and won't reveal the contents of her trust. What do I do?
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