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  1. #1
    Join Date
    Feb 2013
    Posts
    15

    Default Liquidating a 403(b) Account in Divorce to Avoid Penalties

    My question involves a marriage in the state of: California, County of Riverside.

    Is something like this possible in an open California Dissolution:

    Facts: We have a total of about $50K of unsecured debt owed to 3 different credit card creditors. All of this debt is “old” – more than 4 years sitting basically untouched. The creditors are not yet aware of an impending divorce. We can settle all of the debt for about $0.35 on $1.00 if we act before end of this year. Yes, we are aware there will likely be some tax consequences related to the forgiveness of debt, possibly in 2014. Even with the tax consequences, the savings to the community property will be $15K or more.

    The question: Could 1 of the several retirement/pension accounts be liquidated pursuant to an agreement/court order, BEFORE the balance of the community property is decided on how it is to be divided? If a 403 b account is liquidated by court order as part of the MSA, I believe the owner of the account is not charged the typical 10% penalty for early withdrawal.
    If something like this is possible and makes financial sense, both parties are in agreement, etc. would this idea require a motion for bifurcation to make this happen? FYI, this particular account is not joined - yet.

    Maybe I’m coming from way out is the left field bleachers, but we’re just trying to save a couple of bucks here and there.

    Thanks in advance!

  2. #2
    Join Date
    Jun 2006
    Location
    Massachusetts
    Posts
    24,521

    Default Re: Early Liquidation of 403(B) by Agreement. It Makes Financial Sense, Doable

    I'm asking this for a reason.

    Are you still employed by the employer who provided the 403(b) as a benefit?

  3. #3
    Join Date
    Mar 2013
    Posts
    18,340

    Default Re: Early Liquidation of 403(B) by Agreement. It Makes Financial Sense, Doable

    Quote Quoting NotSkeered
    View Post
    we’re just trying to save a couple of bucks here and there.
    I don't see any upside to your plan.

    For one thing, if you defaulted on all the credit card debt over 4 years ago, the statute of limitations has run out and the creditors won't be successful in suing because you can raise the SOL as a defense and the lawsuit goes away.

    For another, paying anything won't improve your credit reports because the balances will be charged off after you pay the portion and you'll still have to wait almost 3 years for the negative entries to drop off your credit reports..

    And any money you take out of the 403(b) is not only gone forever but is taxable as ordinary income even if you manage to avoid the 10% penalty.

    I hope you have cancelled the credit card accounts and cut up the cards so the accounts can't be used by either of you anymore. Leaving them active is dangerous.

    I'm not sure where you come up with a $15,000 savings but way I see it is you take $17,500 out of the 403(b) and pay tax on it. Then maybe you get 1099s on the balance of the debt $32,500 and you pay tax on that. You're still paying tax on $50,000 at let's say a 25% rate for a total tax of $12,500. Add the $17,000 to that and your debt settlement has cost you $29,500. Keep the $17,000 in the 403(b) and your debt forgiveness only costs you $12,500.

    You're best bet (I think) is to forget about the debts and split the 403(b) on a QDRO (Qualified Domestic Relations Order) so you each get to keep a tax deferred account of your own.

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