QDRO Rules
Does anyone have a grip on QDRO rules regarding a divorce?
It is my understanding that the 10% penalty (when withdrawing money out before age 59 1/2) applies when money is coming out of an IRA (not including first time home buyer, medical, etc.) but not when coming out of an ERISA plan like a 401k. I have a client who is attempting to access some of the retirement money and is trying to figure out the best way to structure QDRO so he can have access to funds without 10% penalty. Any citing of IRS pubs. would be helpful.
Thanks!
Permalink Submitted by Alan Spross on Thu, 2011-09-01 15:59
Yes, the QDRO penalty exception only applies to distributions directly from qualified plans, not from IRA accounts. Here is an IRS chart comparing the penalty exceptions. The QDRO exception is the 9th one down the list and the IRS code section is shown:
http://www.irs.gov/pub/irs-tege/early_distributions.pdf
Permalink Submitted by Peter Lingane on Fri, 2011-09-02 18:14
The QDRO exception does not apply to IRAs.
That does not mean, however, that there is an early distribution penalty if an IRA is divided pursuant to a “a decree of divorce or separate maintenance or a written instrument incident to such a decree,” IRC 71(b)(2)(A), since the division is not a taxable event. IRC 408(d)(6) or IRS Publication 590, p. 28. A ten percent penalty on a nontaxable transaction is zero!
The publication cited is “accurate” but misleading.