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Chapter 18. Cashing In or Out of Your 40... > Section 72(t) Withdrawals - Pg. 181

Cashing In or Out of Your 401(k) 181 If you're caught up in a divorce, review not only the bottom line but the potential of the asset to increase in value. Splitting everything right down the middle is virtually impossible unless you want your home to resemble the movie The War of the Roses, in which the warring spouses divide their furniture by chainsawing it all in half. In our preceding example, a truly equitable split would have been to sell the house and share the proceeds, and then to have divided equally the 401(k) via a QDRO. We don't live in a perfect society, but you have been forewarned, and forewarned is fore- armed. The former spouse, who is now entitled to part of the 401(k), has some decisions to make. Take it, leave it, or roll it. Taking it in a lump sum will trigger taxes on the payout, but not a penalty even if the recipient is under age 59½. Leaving it inside the plan will depend on the courts and the plan document (SPD). Leaving it will not trigger taxes until the funds are distributed. Rolling it into an IRA is by far the best option. No taxes will be due until the funds are distributed, and with an IRA there will be many investment choices available. For What It's Worth Your spouse does not have access to your 401(k) while you are alive. A spouse is the normal designated beneficiary of your plan at your death, unless he or she has signed off on this also. But while you are alive, your spouse can't go to your employer and empty out your pot. If the recipient of the 401(k) is not a former spouse, but a child or dependent, he or she is not allowed to roll the proceeds into an IRA. That privilege is allowed only between spouses. Taxes will be due on the distribution, but it is not the kid who must pay the taxes, it's the owner of the 401(k) account. That's right, you. Our advice: You can't fight city hall on this one, so pay up. Disability Without going into graphic details here, you must be retired on account of a permanent and total disability if you want to be able to get your 401(k) plan money without being subject to the 10 percent penalty if you are under age 59½. According to the IRS, you must meet a special definition of disability by virtue of being unable to "engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration." (Translation: There's no hope.) So the money in your 401(k) is there for you. Section 72(t) Withdrawals If you want to get at your 401(k) once you've left your employer, most often your only choice will be "all or nothing." (Translation: Take the entire balance as a lump-sum distribution, or roll over the entire balance at one time.) But if your plan permits other types of distributions, check this out. Section 72(t) of the IRS code is a well-kept secret, and the guys in Washington are hush-hush about it. Why? Because it allows periodic distributions based upon IRS-approved calculations. All IRA and 403(b) account owners are eligible at any time for any reason. But participants in a 401(k) plan are eligible only after separation from service (PC for fired or quit). This is only worthwhile to consider