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Yes, you can avoid penalties with a QDRO

| Apr 12, 2019 | Divorce

If you plan to take money out of a retirement plan with a QDRO, you should know that there is a 10 percent plan penalty. However, it’s sometimes possible to withdraw money from the plan prior to retirement.

One of the times you can withdraw ahead of time is during divorce. The 10 percent penalty tax is imposed by the Internal Revenue Service but is waived when the money is withdrawn for an alternative payee, better known as the spouse who is not the employee who earned the retirement plan’s funds, in the case of a divorce.

What happens when you request a withdrawal?

When you request the withdrawal, it should be for a fixed dollar amount. Then, the remainder stays in the retirement plan or is able to be moved over to an IRA.

For example, if you have a 401(k) that is worth $2,000,000 and agree to a 50-50 split in divorce, then you will each have $1,000,000. To obtain that $1,000,000, your spouse will need a Qualified Domestic Relations Order for the specific amount. The QDRO has to have language instructing the plan to divide the 401(k) or another retirement plan into a separate account provided by the alternate payee.

The alternate payee has one opportunity to take some of those funds out prior to age 59 and a half. That qualified withdrawal will not be subject to penalties from the IRS, even though it is being taken out before retirement age. Following that withdrawal, the alternate payee will need to wait until retirement age to receive the funds or face a penalty.

For more information on how a QDRO works with divorce, talk to an experienced legal professional today.