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‘Is he trying to trick me?’ My husband wants a divorce after 20 years. He offered his $275,000 401(k) in exchange for our $250,000 house.
“He thinks I could use the money from his 401(k) to buy a house or use some of it as a down payment.” (Photo subjects are models.) – Getty Images/iStockphoto
Dear Quentin,
My husband doesn’t want to marry me anymore.
I’m 61 and he’s 51. In 2006, I left my job and used my 401(k) to pay off all of our debt. A few years later, he applied for and got a credit card in his name to buy a three-stone diamond ring as a birthday present for me. And we started accumulating debt again.
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In 2012, I stopped working because I became disabled. He was in favor of me quitting for the sake of my health. I used my 401(k) for living 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 leaving work, I qualified for Social Security Disability Insurance. With SSDI, I only made $500 less than I did when I was working. Last year I sold another Jeep so we could pay off all our debts. Starting next month, we’ll only have his mortgage and car payments.
And now? We are getting divorced. In March, we had been married for 20 years. Am I entitled to half of your 401(k), which is currently valued at $275,000? How would this 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 buy a house or use some of it as a down payment. Is he trying to trick me?
Soon to be divorced in Wisconsin
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“Any contributions made to your 401(k) in the last 20 years would be considered community property and, I assume, were your peak earning years.” – MarketWatch Illustration
Dear soon,
I have a question for you. Why doesn’t your husband use his money? from him 401(k) to buy a house or use it as a down payment? As a general rule, people don’t make grand gestures in divorce unless it benefits them – and I’m 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 split 50/50 in the event of a divorce. Therefore, any contributions made to your 401(k) in the last 20 years would be considered community property and, I assume, were your peak earning years.
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You should already receive 50% of these contributions because that’s the law in your state, and you deserve them because you liquidated your own 401(k) to pay off debts 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 grudgingly.
Don’t just take my word for it – talk to your attorney and CPA. But since you asked: If you took all of your husband’s $275,000 401(k), you would have to pay income tax 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 required to consider the tax implications for both parties,” according to Karp Iancu, a law firm with offices in 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 little like dividing a pension and a little like dividing an IRA,” the company adds. “Just 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 simply by looking at the balance on a checking account statement.”
From your letter, you both contributed to a lifestyle where you lived beyond your means. And yes, people often get into debt because, no matter how hard they try, they can’t survive without putting some expenses on their credit card. Now that you are planning to live separately, you will see who is best able to live within their means.
About that credit card: Your husband should have taken out a credit card to buy a three-stone diamond engagement ring after you cashed out your 401(k) before turning 59 1/2 and incurred an early distribution penalty 10%? No. You both need to take responsibility for this. Was that the real/only reason he got a credit card? Probably not.
If he continues to make risky financial decisions based on “want” rather than “need,” your divorce will not mean the end of his financial near misses.
Previous columns by Quentin Fottrell: