Homer and Marge Simpson – Divorced? What Happens to Homer’s 401(k)?
By Beverly DeVeny, IRA Technical Expert
Follow Me on Twitter: @BevIRAEdSlott
This rumor of Marge and Homer Simpson’s divorce made the rounds late last week. It was quickly countered. They are supposedly separating for only one episode. But how would a separation or a divorce affect Homer’s retirement assets?
I am assuming that Homer has a 401(k). After all, he has been working at the power plant for almost 30 years. I am also assuming that Marge has no retirement assets. She has been staying at home raising their three children for the last 30 years (and yet none of them get older!).
The first question Homer will face is, “where will I live?” The next question will be, “how will I pay all of my expenses?” He will continue to have his household expenses for the house where Marge and the children live, as well as his own living expenses. Assuming that Homer is like most “middle class” Americans, he doesn’t have much in the way of savings.
Homer might decide to go to his employer plan for the extra cash he needs. Since he appears to be under the age of 59 ½, he will not have full access to those funds.
If his plan allows, he might be able to take out some funds due to hardship. He will have to show that he meets the federal rules for such a distribution. This distribution will be taxable to Homer – even if he gives the funds directly to Marge – and, since he is under age 59 ½, he will also be subject to the 10% early distribution penalty if no exception to the penalty applies. This is not a great way for Homer to get the extra funds he needs.
Homer might be able to borrow funds from his employer plan, if the plan has a loan feature. There are limits on how much he can borrow and the balance must generally be paid back in five years. The repayment amounts will generally be deducted from Homer’s future paychecks. There is no income tax on this transaction as long as the loan is repaid. So, the result of this transaction is that Homer cannot pay all his expenses with his current earnings, so he borrows from his plan, which reduces his paychecks for the next five years, so he is now less able to meet his current expenses. Again, not a great solution to Homer’s problem.
If Homer and Marge got a divorce, Homer’s 401(k) could be split between them. Homer would need a court order, (a domestic relations order – DRO) which he would need to submit to his employer. Once it is qualified, (it becomes a QDRO) Marge would have access to her share of Homer’s plan assets. Any distributions she takes directly from the plan would be taxable to her, but there would be no 10% early distribution penalties. If she moves the plan funds to an IRA, her subsequent distributions will be taxable and subject to the penalty. However, there is no way for distributions from Homer’s employer plan to be taxable to Marge while they are separated.
In order to solve their money problems while they are separated, they might have to consider the unthinkable. Homer might have to get a second job! This would seriously interfere with this time at the bar with his friends. Alternatively, Marge could get a job. But, after paying childcare expenses, getting a new wardrobe, and, maybe, a new hairstyle, Marge would have little left to pay her living expenses.
Unfortunately, this is a situation that all too many couples, married and unmarried, face. Taking funds from retirement plans to solve immediate cash needs is never a good idea. The repercussions start almost immediately with the income tax and early distribution penalties that could be due on the distribution. They continue on into retirement when there is not enough money to live on because you spent it while you were young. While Homer and Marge will be magically able to solve their fictional problems, that option is not available to the rest of us.
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