401k rollover as QDRO and pre 59 1/2 distribution for spouse
Good morning,
I have a client that is divorcing and will be getting some assets in a 401k from her ex.
She is thinking of transferring part of this money to an IRA to take distribution for her house payment, she is not 59 ½, is there going to be the a 10% penalty for those withdrawals?
Thanks for your help.
K
Permalink Submitted by Martin Helmer on Mon, 2008-09-01 16:07
Internal Revenue code section 72()(2)(C) provides an exception to the 10% tax for distributions made to an alternate payee under a QDRO. However, that exception is lost if the rolled over funds are then taken from the IRA. Possibly she can qualify for the first time homebuyer exception, which applies to distributions from an IRA but not to distributions from the 401(k). The first time homebuyer exception is limited to $10,000 of distributions, saving $1,000 in tax.
Alternatively, are you able to have the plan make a partial distribution to her and not to her IRA? If so, there will be 20% in mandatory withholding. Withholding is not the same as tax liability. This often creates a tax refund due that can be recovered next year but you do save on the 10% penalty.
Permalink Submitted by Clyde Wolf on Mon, 2008-09-01 19:19
The first time home buyer distribution of up to $10,000 penalty free must be used within 120 days after receipt. This $10,000 is a lifetime maximum for qualified first time home buyers.
The distribution must be used to buy, build or rebuild a home, that will be your main home.
If your client is eligible, a 72t arrangement from the IRA may be the way to go to make the house payment penalty free.