Penalty Free 401k Funds During Divorce

With economic times being as tough as they are, many couples we see at Equitable Mediation Services of New Jersey cite money as the single largest obstacle to getting a divorce.  And while there are many benefits of mediation including significant cost savings of $20,000 or more in legal fees, if money is tight, as it is for many of us, there is an option some couples are using in order to get back on their feet more quickly.

Not that I am a big proponent of mortgaging one’s future, but there is a way to receive money from a 401k penalty-free when going through a divorce.  And while this option isn’t for everyone, it can be a good short-term bridge to get an individual a lump sum of money they can use to buy a house or pay down debt without having to pay the 10% early withdrawal penalty.  Keep in mind this option may not be for everyone, including those that are close to retirement.  I would recommend that someone who still has a fair amount of time to save for their retirement (10+ years) use this option and only as a last resort.  You should always speak to your accountant / attorney  / mediator to see if this is a good idea for you.

As part of your divorce, your attorney can draft what’s know as a QDRO – Qualified Domestic Relations Order.  This QDRO will outline the terms of the transaction and is filed along with your divorce and sent to your plan administrator.  A lump sum will then be given post-divorce from the plan administrator to the receiving spouse from the 401k of the other spouse.  By using the QDRO the receiving spouse would only have to pay the taxes on the money and not the 10% early withdrawal penalty. It is important to note, this can only be done for divorcing couples and not be used as a legal “end-around” to avoid paying early withdrawal penalties.

The amount transferred is completely dependent on the terms of your equitable distribution arrangements and can be used to either off-set the value of other assets divided during divorce mediation or in some cases, each spouse gives the other spouse an equal amount of money from their respective 401k’s to free up funds penalty-free with no net effect on the bottom line of their equitable distribution.  Your mediator can work with you to incorporate the terms of such an agreement into the Memorandum of Understanding and advise you on what questions to ask your attorney should you need further guidance.

As this is a rather complex financial matter, it is best that you contact us directly to discuss your specific situation so please give us a call at (908) 864-2177 if you have any questions about this topic or to schedule an initial meeting where we can review your specific situation and see if the transfer of penalty free 401k funds during divorce is an option for you and your spouse.

Devising a Parenting Plan in Divorce Mediation that Works

As the holidays approach, a common challenge facing divorced couples is how to handle the children for the holidays.  With Thanksgiving having just passed and Hanukkah, Christmas, Kwanzaa, New Year’s and many others approaching, divorced parents need to make sure that the parenting plan they work out in divorce mediation can be applied in the real world.  Not sure what I mean?  Or does this story sound all too familiar…

The Story of “Jane” – a 5-year old girl of divorced parents

It’s Christmas Eve and Jane is excited because tonight is the night Santa comes to her house.  Despite her parent’s divorce (she blames herself for the divorce – she must have done something bad) Jane closes her eyes and goes to sleep at her dad’s house because Santa knows when you are sleeping and he knows when you’re awake and she’s hoping this is going to be the best Christmas ever!

Jane can’t wait to get up!  The sun peeks in the window and she knows it’s morning.  Down the stairs she goes and to her surprise and delight there is the greatest gift under the tree – one she has been waiting for forever and ever – a pony!  Thing is, Jane has to go to her mom’s to celebrate Christmas morning (in the settlement dad only got her Christmas eve and has to bring her to mom’s by 8am) so Jane can only pet her pony once or twice before she has to go upstairs, get dressed, eat breakfast and get in the car to enjoy the 40 minute trip to mom’s house. Dad doesn’t want to get yelled at by mom for being late so he hurries both of them through the getting ready process and he shaves in the car along the way.

So much for the pony…

Jane is now crying as she arrives to mom’s as she is tired, confused and misses her new four-legged friend already.  She hardly got to know him!  Mom starts yelling at dad asking him “what did you do to make her cry like that?!” Mom and dad continue to fight but meanwhile nobody noticed Jane who as most 5-year olds (and quite frankly most of us) aren’t really awake and focused at 8 in the morning – especially on a holiday!  She is sad, confused and just wants it to stop.

If this sounds familiar, then it sounds like you have some work to do on your parenting plan.

The point is, parenting plans are for the benefit of the children, not for the parents and should be designed to ensure that the child gets to spend quality time with each parent.  All to often, parents feel like they don’t want to get cheated out of time with their child and so they devise these unmanageable schemes to make sure the holidays are split evenly, even if it means at the expense of the child and they never work.

When devising your parenting plan, remember you are the adults and sometimes being an adult means not getting what you want and doing what’s in the best interest of your child.  When your parenting plan is done, have a look at it and see if there is any unnecessary jostling of the child or shuttling from house to house mid-day.  No one (including you) is going to enjoy themselves if they have to worry about a mid-day exchange and your son or daughter is not going to look back fondly of the time they spent in the car, being exchanged in the parking lot of a McDonald’s and not getting to pet their new pony.  Try for even day breaks or exchanges late in the day to ensure the child is getting the full experience and attention of time well spent.

If you have any questions about parenting plans or any other questions about divorce mediation, please feel free to contact us here at Equitable Mediation Services and we’ll do our best to help you devise a parenting plan that will be fair, equitable and good for all of you – especially your child.

Does This Sound Like You Part III – Story of a Divorcing Couple

In Monday’s post, I told you about a couple I saw on the Today Show on NBC that was living together due to the economy, even though their intent was to get divorced as soon as possible.  Unfortunately, their story was much like many of the couples we see at Equitable Mediation Services of New Jersey in that they wanted to get divorced but just couldn’t afford it.  In today’s final installment of this three-part series, we’re going to offer you some tips on how to stay together if you think the time just isn’t right to get a divorce.

First you both need to be clear about how the finances of your relationship are going to work.  You probably have joint back accounts, credit cards, etc. and have a home that’s in both of your names.  How are you going to handle the finances in the short-term while you are still both together?  This may be a good time to talk to a mediator who can work out a plan for both of you to make sure things are going smoothly.  it can also be a good opportunity to try a financial arrangement on for size to see if it’s manageable once you do both go your separate ways.

Next you should really have a plan for how you want to proceed with your divorce.  Set a timetable, select a mediator and try to begin thinking about a parenting plan that can work for you once you do go your separate ways.  The more work you do while you’re still together, the easier it will be for you to go your separate ways with as little disturbance to you and your children as possible.  I know things are tough but staying together shouldn’t be an open-ended proposition.

Next take a look at your house.  if one of you wants to live there after the divorce, take small steps now to see if it’s possible.  Talk to a mortgage lender, get your credit report and make a budget for yourself.   No one wants to leave the home they built a life in but the sad reality is it’s more expensive to live in a house alone than when you’re married with two incomes.  See if it’s reasonable financially because additional stress is not something you will need while healing from your divorce.

And speaking of your house, if you do think you may be together for the long term (based on your plan above) then carve out separate spaces for yourselves in the marital home.  Sleeping on a couch is going to get old after a few weeks so make sure you set up as normal a routine as possible including having your own bedroom, bathroom and living / TV area.  I don’t know many houses with 2 kitchens so you’ll have to work on who gets to use the kitchen when.

Lastly your children may be confused and ask questions and that’s perfectly normal.  Putting a structure in place of who spends time with them when and what rooms mommy and daddy live in will help them manage a little better once you do part.  Kids like routine and stability so providing such a structure will also help them cope.

Remember this – I know times are tough and I know trying to stay together because you think you can’t afford to get divorced may be your only option. But you have to ask yourself this:  what is the emotional toll on me and my children of staying together?  You can’t put a price tag on that.  When you’re ready and looking for a divorce mediation in NJ, feel free to contact us at Equitable Mediation Services to see how we can help.  We do offer a free, no obligation consultation so feel free to drop us a line or give us a call.

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