Will I be taxed if my husband is transferring money over to me out of my 401(k)?

If my husband is getting money out of my 401(k) from divorce and giving me some of it to pay our outstanding bills, will I be taxed? 

This 401(k) transfer will not be taxed to either your husband or yourself. However, you must treat these funds as a qualified retirement asset. That means they are subject to all of the rules and regulations covering IRAs and 401(k)s.

So, if you withdraw any of these funds, you must include the amount of those withdraws as ordinary income on your federal income tax return. And if you are younger than 59.5 years old at the time of the withdrawal (with very few, very specific exemptions), you must also pay a 10 percent penalty on top of the income tax due.

It may be in your best interest to trade a portion of the 401(k) payout for a direct-cash transfer from your soon-to-be ex-husband. A direct-cash transfer is not taxable, and you may use the funds for whatever you wish with no adverse tax consequences.

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or locate a CPA near you.

Answered by: John R. Steffee, CPA, is with Simon Lever LLP in Lancaster, Pa.