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Divorcing Couples: Finding Money for a Downpayment
Divorcing Couples Can Avoid the 10% Penalty on Retirement Fund Early Withdrawal Often when couples divorce, there is a retirement fund that needs to be split. This can be an excellent source of money for a down payment on another house. However, normally these funds are subject to a 10% penalty tax by the IRS for "early distributions", if the funds are disbursed before the participant is 59 1/2 years old.
In a divorce situation, there is often the opportunity to withdraw money and avoid the 10% penalty. Let's say that Sarah and John are getting divorced, and Sarah is getting half of John's 401k which is worth $640,000. Sarah's half is worth $320,000. If Sarah needs to take $100,000 in cash for a down payment on a house, there is a special rule for divorcing people that enables her to take cash without having to pay the 10% penalty. In Sarah's case, it saved her $10,000 in penalty fees!
A Certified Real Estate Divorce Specialist or a Certified Financial Divorce Practitioner can help your client discover exactly how to take advantage of this opportunity. However, it is important to know that this opportunity to avoid the 10% penalty tax is ... more
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