Rollover due to a QDRO
A client asked me if I am aware of when the rollover takes place that she can remove some money without tax penalties. I am aware of the standard ways to avoid penalties from removing money from an IRA pre 59 1/2. Are there any other exceptions due to a QDRO?
Thank you.
Permalink Submitted by Alan Spross on Wed, 2012-09-12 19:05
The QDRO penalty exception only applies to distributions directly from the plan. Once the funds are rolled over to an IRA, the QDRO exception no longer applies.
Permalink Submitted by [email protected] on Wed, 2012-09-12 19:31
Could she do a partial distribution from the plan and then rollover the remainder and avoid the penalty on the money she takes from the plan?
Permalink Submitted by Alan Spross on Wed, 2012-09-12 19:45
Yes, that’s possible as long as the plan allows it. The taxpayer can take out enough funds penalty free to last until age 59.5 and roll over the rest to an IRA. If the plan allows periodic distributions that is even better because the taxpayer can take out only as much as they need for the current year instead of a larger amount that could inflate their tax bill. But if the IRA rollover is done initially, the taxpayer would have to guess at the amount needed until age 59.5 and leave that in the plan.
Taxpayer could always roll the entire balance out if eligible and then start a 72t plan from the IRA. However, these plans are rigid and inflexible and current yield only around 4.5% of the IRA balance per year which may not be enough. These plans are typically used as a last resort.