Question: Having been involuntarily involved in the “divorce process” for nearly two years, my wife’s and my lawyers have caused us to waste huge amounts of time and money, much on their fees. Rather than being creative and helping us solve our problems, they seem to have manufactured meaningless disputes to pad their pockets

Although I earn a good living as a manager for a large company, many jobs have been moved overseas and the raises and opportunities are not there to support the lifestyle we were once able to enjoy as a family. Our net worth increased until the recent debacle, which not only reduced our equity but also minimized the dividend income we once had. Our second-largest asset is my 401 (k), which has a current balance of about $500,000. But the lawyers say we can’t use this without incurring taxes and penalties.

My wife is 54 and is unemployed outside the home. The younger of our two children is in his last year of college, which is being paid for by my parents. At 57, I hope I still have some productive years ahead of me, but some days I am not so sure, and I am frightened about committing to alimony since I may lose my job. On the other hand, I understand my wife’s fear of not having enough to live on. Our house won’t sell. It seems there should be ways in which to take advantage of what we have accumulated without getting pounded by the system and the government.

Answer: In almost every divorce and separation, the income that was sufficient to support one family under one roof is insufficient to fund two separate households. For husband, wife, and children to enjoy even a semblance of their former standard of living, the creative production of cash flow is often essential. For this reason, it is often advisable and necessary for lawyers to include financial and tax experts as part of the planning team.

First of all, contrary to what your lawyers have advised you, monies from your qualified retirement plan (Pension, Profit Sharing Plan, 401(k), IRA's, etc.) can be used at the time of a divorce to increase cash flow without penalty. Depending on amounts and needs, this cash flow can enhance, reduce, or, in some instances, replace spousal support.

Although distributions from a qualified plan prior to age 59-½ normally trigger a 10% penalty in addition to income tax, you can transfer all (certainly not suggested) or part of the funds in your qualified plan to your wife's IRA without tax or penalty through a qualified domestic relations order (QDRO). Once properly transferred from one qualified plan to another without tax or penalty, even though your wife has not yet reached age 59 ½, using what is called “72(t)”, she can withdraw a series substantially equal installments for five years or until she reaches 59 ½, whichever is later, and not pay the 10% penalty. Your wife will be required to pay income taxes on the amounts withdrawn.

According to the general rule, once the amount is determined and payments begin, your wife will not be able to change the amount or she will face penalties retroactive to the first payment. However, since 2002, the IRS has allowed a one-time change that may be helpful when, in times like these, the stock market decline causes the annual 72(t) payments to become a larger percentage of the IRA balance.

In addition, with proper investment advice, all or part of your stock portfolio that may have been geared toward growth could be moved into an income-producing mode. In this way, your wife could withdraw established amounts from the portion of qualified money set aside to her and receive income from the portion of the stock portfolio that may be moved over to her side of the ledger. In this way, your out-of-pocket expenses each month would be reduced, but you and your wife will both be betting on a stronger economy to make ends meet. In effect, you will be using your retirement for current living expenses which, while not the wisest thing to do, may be your only option.

Bottom Line: Qualified money and investing for income can play an important role in the settlement of domestic relations disputes by creating or supplementing income streams. Although the substantial equal withdrawal option will work with any amount, be sure to contact professionals who can help you fashion the rollover and structure the substantially equal payments before you make a move. And, while we would normally warn our readers to know the cost of the capital gains taxes before stock is sold, we don’t know many who have this problem today.