I recently got an idea, but I'm starting to doubt that it is feasible, and it may not even be legal for all I know. I know BP has people of all backgrounds so I expect someone might be able to answer my question. The situation is kind of complicated, but I'll do my best to explain it.
About three weeks ago I got a divorce. For the settlement, I transferred money from my retirement investments to her. Our plan was that since she would be going to nursing school for the next two years, I would give her enough to help her do that and find a very cheap place to live. It was a pretty lopsided agreement, but I want her to have the resources to have a future.
I recently had an idea that would be a win-win for us both. Instead of her using the money allocated towards finding a very cheap housing situation, she could give me enough to make a sizable down payment on a loan to get a property that is nice enough for me to rent out when she leaves. I would be able to get into real estate, and she could live in a decent place for a while.
But is that even legal? Can she give me some money she received by cashing the retirement money I transferred to her? If that is legal, is there some way that I could use that money to secure a loan that I probably couldn't get without a 40% down payment on a 100K house for rent? Would she have to be on the mortgage? Her credit is really bad. Thats why we think that to get a loan, it would have to be through me.
I don't know about the legality of it but I would seriously, SERIOUSLY, question how smart it is. I know lots of people who think that they are going to have or that they had an amicable divorce, but there are always hard feelings there. I would not want to be financially tied to someone that I divorced any more than absolutely necessary. I think you are setting yourself up for some serious pain down the road. I can see so many ways that this ends badly, very badly.
DISCLAIMER, I am not licensed to practice law in your State.
The transfer of the retirement assets to your ex, as part of your marital settlement order from a court, converts those assets to her, lawfully and legally. Any tax ramifications you will face (early distribution penalty if you are under 59 1/2, taxes on the distribution etc.) are on you. Now that those assets are lawfully your ex wife's assets. She is free to do whatever she wants with them, including loaning/giving them to you so you can do whatever you want with them. Having said that, I agree with @Edward B. wholeheartedly. This is not a road you will likely enjoy going down in terms of buying a joint asset with your ex-wife, having her live in it now, and then surrender the asset to you later (even if you compensate her for it.)
The song "Bad Moon Rising" comes to mind...
Listen to the guys above. Having lived (barely) through 4 divorces I can attest to one divorce is worth 2 stock market crashes and the road to hell is paved with good intentions. Get back in the shower and come up with another plan.
If she contributes funds (source is irrelevant) she could later make claims against the new property.
Although a divorce may be finalized, your lives will be tangled for a long time thereafter.
Thanks for responding. I understand your concern but the fact is, something like this seems like the only way I can save face and try to get something out of this. I should have just agreed to give her money for school, and to help with her debt, but it wasn't necessary to give her enough to buy outright a house and pay the taxes. Instead, our arrangement meant she could own a small house, have most of my retirement, while I'm still paying the mortgage of my own home. I don't have any malice towards her, but to be truthful, I have begun to feel a little bitter. I think it became more acute when I realized that so much of what I had earned over 25 years, was now gone, I'll be basically starting over.
I see this as the only way I can look at myself and not feel quite so duped. I would be trading retirement money for an investment opportunity. Any money she gave me towards the down payment, and the house itself, would be mine. I could sell the house for half of what it is worth, pay the bank back, and walk away with thousands of dollars I would never have seen without such an arrangement.
For example example, I was pre-approved a loan of $120K with a 40% down payment. Awful terms, but it's because my income is so low. If she only gave me $48K I would own a house valued at 120K, and I would owe the bank $72K. When she leaves after a couple years, I sell the house for $80K and still come away with $8000 more than I would get if we do not make any sort of arrangement. Moreover, my proposal has been 80,000. not $48,000. I don't know how I could lose.
The way I see it this would be me taking advantage of her. She will not find anything for 80K minus closing. I would be taking advantage of that to get $80,000. But it would be in her interest too, because she will have a place to live rent free(for a short time), and more money short term to do some of the things she would like to do. She would have a nicer place to host her son who is in Scotland, if he would come for a visit. He would have a place waiting for him if he chose to come back to the U.S. and go to Eastern Mich University, or WCC. When you look at it this way, the is potential for it to be a win - win - win arrangement. We'll see
let it go...
@Timothy Wright just say thank you and walk away. Your plan is bad. She could just take that $48k and pay rent on a great place for 2 years, so why would it benefit her to just give it back to you? There is no win-win here. Consider your loss as the price of an educational course and move on. These aren't the droids you are looking for.
I agree with everyone else here for many reasons. Why would she give you 48k as a down payment on a home she wouldn't have any equitable interest in? I know you said she will have a place to live 'rent free' but coughing up 48k doesn't exactly seem free to me. As already mentioned, she could take those funds and rent for several years and not be beholden to her ex-husband as her 'landlord'. Furthermore, when the time does come for her leave - she could make a big stink about it and claim that she does in fact have an equitable interest in the property. Since she would basically be 'gifting' the 48k to you, she may also be on the hook for gift tax (disclaimer - not an accountant so I have no clue, just putting it out there) which then creates a paper trail and gives her a stronger case that she has an interest in the property. I would be afraid that this could result in nasty litigation down the road...however it sounds like you've already made up your mind so whatever you choose good luck!
Thanks for all your feedback, everyone. Thats a lot to think about. At this point, she hasn't even said Yes or No, and she is probably a month away from getting that settlement money.
Take your losses and move on. My father taught me that you can tell if a deal is fair by asking if I were on the other side, would I want to enter into the proposed transaction? In this case, she would be crazy to do this if she is thinking clearly. Dividing the retirement plan funds through a QDRO is a nontaxable event. If she takes out the money to give you, she pays her highest marginal income tax rates and likely a 10% early distribution penalty plus filing a gift tax return. She should keep the money invested in her own retirement account. I have had to start over twice through divorce so I understand the emotional and financial pain. However, this kind of deal will just prolong the suffering and cause more pain.
Hi Victor, I didn't realize there were so many penalties. It was explained to us that she can request the funds be taken out without the early penalty, but only the taxes. Isn't there some condition under which she can withdraw the money without early penalty, like for getting a house when she has no where to live? Of course, now that I think about it, if that was the pretense for her getting the money out early free of penalty, then that could be what is wrong with this idea. According to this idea, she would not be using the money to buy a house. She Would, be using most of it to pay for nursing school. Is that a valid reason to avioid the early-withdrawal penalty? We knew it will be taxed, but I thought there were situations, such as buying a house, which allow one to withdraw the money without additional penalty.
Regarding your point that she should keep it in her retirement, that would undoubtedly be true if she had enough money to get by without it. If we are talking about what she Should have done, well, it would have made the most sense to stay with me until she was done with her nursing degree. However, I guess that just wasn't an option for her, and I accept that. Oddly, it seems like we are better friends now than we were in our last year of marriage. lol
You may be on good terms now, but as the others said, what will she be like in 2 years?
Honestly, that to me is the biggest question. Your idea isn't too shabby on paper and maybe she'd fall for it but just wait-- she might chat with her friends and parents and then realize she could have used THEIR credit to buy her own property!
As Dave Hurt mentioned and the others-- forget it.
So sorry though about the divorce.
She could withdraw up to $10,000 from an IRA (not 401k etc) to purchase a home she owns if she hasn't owned a home in the last two years. The funds up to $10,000 would incur ordinary incone tax but not the early distribution penalty. That isn't the deal you described. I am assuming she is younger than 59 1/2. She should check out her financial aid and student loan options because even a student loan will cost her less than the tax on early distributions from a retirement plan. An RN will easily make enough to repay student loans.
You are correct that distributions from an IRA for qualified education expenses are not subject to the early distribution penalty. Again, that is not the transaction you proposed.
@Timothy Wright Hi Tim, sorry to tell you the following, but cut all ties. If you are getting divorced it is for a reason, right? Unless if you are divorcing her because you are moving into another relationship, I am not sure why you are seeking to help her that much. It is nice of you to want the best for her and to help her with education, but to think that she will give you money, well..........
Right now, the only thing that should be on your mind is finding a way to bounce back and be better positioned finacially and mentally. Think about how will you create more income and less about how she might be willing to better your situation.
Keep your head up and stay strong!
please listen to these guys that's what the forum is for.
I'm now inclined to agree. In any case, I think this conversation has gone about as far as it needs to go. Thanks for your advice, everyone
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