I hav to start a new life and will be using this money. I want to cash it out it entirety. What penalties will I face? Must they be paid at cashing?
You can work with an advisor to open an IRA to receive your portion of the 401k. Once the decree is signed, you can work with the human resources department to receive your portion. I'm not sure of your age, but if you are younger than 59 1/2, I strongly advise you not to "cash out" and to let that money work for your future. You can have the taxes and 10% penalty withheld should you decide to take them. There are other options available that can help you avoid the penalty, but they are too complicated to disucss here and may not even fit your situation. Everyone's circumstances are different, but I strongly recommend that you find a CFP(R) professional to work with you to help you create a solid financial plan for your new life moving forward.
Good luck, Helen
While it is tempting to see this money from your ex-spouse's 401(k) as a ready source of cash, I echo the views of my colleague here and strongly urge you to not tap into this account.
I realize that you will need cash for a fresh start. This is why I encourage client's as part of my divorce financial planning practice to run the numbers ahead of time. That is the best time to determine what will make an equitable settlement and the impact on cash flow, taxes and retirement of various settlement offers.
At this point, you do not have this option. But you do have control over the tax bill you will have. If you must draw the money out, I encourage you to consider taking distributions in pieces over time. At this time of year, you may be able to spread out the distributions to take a portion in 2012 that will impact your taxes you file by next April 15. And you can then take another portion in January 2013 which will impact your tax filing in 2014.
You can mitigate the impact on your overall tax liability by having the administrator of the plan or IRA you roll the money into withhold a portion for taxes. Generally, I suggest at least 30% (20% for federal and 10% for penalty if you are under age 59 1/2). You may also be subject to state income tax and penalty as well.
I'm not sure if it is an option for you but you may want to consider rolling the funds to your current employer's sponsored 401(k). You may then be able to take a loan against it if that option is allowed.
Also consider that if you need the funds for buying another home, you may be eligible for a waiver of the penalty if you have not had an ownership interest in past two years.
This is something you really should consult with a financial planner or tax advisor for more detailed impact in your circumstances.
Excellent views from Helen and Steve.
Taxes and penalties will severely impact the net amount that you may receive now. Take your time and seek out a local advisors to talk to, so that you may be aware of all your options.
Good luck, David