QDRO
I’m relatively new at this, and I have a client who has a QDRO 401k. They want to take part of the money to pay off bills and roll the remainder over into an IRA.
Is the part they take out to pay bills subject to 20% withholding and 10% early withdrawal fees? Or is a QDRO different?
Thank you!
Permalink Submitted by Alan Spross on Thu, 2008-07-17 23:31
I take it your client is the alternate payee, ie QDRO award recipient. For distributions they take directly from the 401k account, the income is taxable but there is a penalty exception that waives the early withdrawal penalty. But once funds are directly rolled to an IRA, that exception disappears with respect to the IRA funds. In that case a pre age 59.5 client may wish to start a 72t plan.
The 20% mandatory withholding would still apply to the 401k distribution.
You also need to confirm that the 401k is eligible for distribution. Most are in this situation, but the plan document may also not allow for this until some new distributable event occurs.