Divorced client rolling ex’s 401k to IRA – Nest egg provison
My client is going through a divorce and getting part of her spouses 401k. She is 57 and the attorney for her ex asked her if she was going to take advantage of the nest egg provision with her QDRO. The only thing I can find online about this is that keeping it in the 401k under name would allow her to take funds out before 59.5 without penalty. She has plenty of funds outside of the 401k for the next 2 years to ensure she doesn’t have to touch the 401k/IRA. Is there something that we are missing with the “nest egg provision?”
Permalink Submitted by Alan - IRA critic on Tue, 2024-07-02 00:53
This is not a specific benefit as far as I know and an unofficial term. She is the alternate payee and the QDRO allows her interest in qualified plans (her part of the overall nest egg) to be transferred to her, either in a separately partitioned portion of the plan or as an undivided interest in the plan. She may or may not have the option of doing a direct rollover of her interest to her own IRA as that is subject to the plan provisions, but if she does so prior to 59.5, she forfeits the QDRO penalty exception that only applies to direct distributions to her from the plan. If she is very sure that she will not need any retirement funds from any type of retirement plan prior to 59.5, there is usually no reason not to do the direct rollover if the 401k allows it while the ex is still employed.
But she might want to determine if her share includes any highly appreciated employer shares that she could distribute under NUA rules and pay LTCG taxes rather than ordinary income taxes at some point.
Again, a QDRO does not force the plan to provide any benefit to the alternate payee that is not available to the participant spouse.