I am getting 10,000 from my ex's 401K ~ should I opt in a ROTH IRA or Trad. IRA?

Question

My husband and I are now seperated. He has been ordered to give me 10,000 out of his 401K. So he does not have to pay the taxes ~ he wants to transfer it to a IRA for me. In a few years I would like to be able to access this money and buy a home. I am clueless on how IRA's really work. Just going on this info ~ can someone give me advice on which would work better for me?
Thanks a lot!

Answer 1

Here's the deal, you can only rollover money from a 401k into a Traditional IRA because the two are taxed the same. You can take up to $10,000 out of a Traditional IRA for a first home penalty free, but you must pay income taxes on any withdrawal. In a Roth IRA, you can withdraw funds tax and penalty free (and you can take out all Roth contributions at any time for any reason! --just not earnings on those contributions unless it's for a home/tuition/etc.).

So your options are:
1. Get the money in a Traditional IRA and leave it there for your retirement.
2. Get the money in a Traditional IRA and take it out to buy a home--you will pay regular income taxes on your withdrawal but no penalty.
3. Get the money in a Traditional IRA and convert it to a Roth IRA (which you can withdraw from tax/penalty free)--but you must make less than a certain amount to qualify for this conversion AND you must pay regular income taxes on the $10000 before you convert it.
4. Have your husband rollover the $10000 to a traditional IRA and then to the Roth IRA before he even gives it to you. He'll have to pay income taxes on the money, but not a penalty. Then you can use the funds for a home.
5. Have your husband cash out the $10000 and give you a check. Tell your husband you don't want an IRA, you want cash! His tax issues are no longer your problem! This will likely ruin the relationship, though, as he will have to pay the taxes and the 10% penalty. Plus make sure the court ordered him to give you exactly $10000--or he may be able to take the taxes/penalties out of your cut.

Answer 2

Roth and Traditionals have a limit of $4000 a year. Meaning you can only contribute up to $4000 between the two NOT each !!!

Please talk to a tax accountant and ask if a transferring it will fall under this limit as well. If a transfer can take place then you need to open an IRA with a firm and provide his firm with that info. No need for you to give him any info. Let plan holders do this.

A Roth will be your best bet if you can transfer it. You can touch this money at any time with no penalty. You MUST leave in this account though, any interest is has accumulated.

Good Luck !!

: )

Answer 3

The only problem with IRA is that if you spend it you would have to pay the taxes. You aren't really able to spend it till you are retired even if its from your ex. Say if you never divorced and your ex used his IRA with you to buy a home you would still have to pay taxes on it. The reason why he didn't get taxed is because he had to give it to towards your retirement.
maybe he should ask his company about it. From experience i know you get taxed if you your self spends it before your 59 1/2. Good luck. I hope everything works out.

Answer 4

If you take the money out of an IRA before you are 59.5 in age, you pay the taxes as regular income and you pay a 10% penalty.
So about 40% goes to taxes.
So you get $6000 and the IRS gets $4000.
Don't do it!!
Contact a nice mutual fund agent who doesn't screw with his clients and put it away for retirement.

Answer 5

Roll it over into a traditional IRA. If you choose the Roth, you will have to pay taxes.

Answer 6

Living well, looking young and driving a classic 560 SL are the best revenge for a separation or divorce.

I'd take that 10 grand and blow it on a makeover.

Sorry, but that's what I'd do--you cant take it with you and who cares about an IRA if you look frumpier than his new girlfriend at the holiday parties this year?
I'm not saying that you do, but hey, show him what he's missing out on, GF!