401(k) loan prior to Divorce
If a person has a loan against their 401(k) plan and will have to give 60% of the plan to an ex-spouse due to divorce, how is the loan treated? In other words, will the ex-spouse only receive 60% of the 401(k) balance minus the outstanding loan against the plan?
Thanks for any insight!
K
Permalink Submitted by Alan Spross on Wed, 2011-02-09 23:24
The parties must have their settlement included in detail in the QDRO drafted by legal counsel. In other words, the alternate payee gets 60% of WHAT? Other than clarification regarding the plan AND the loan the outcome can be fairly flexible. This link will describe various situations, but remember that the QDRO cannot cause the plan to offer something not allowed by the plan document:
http://www.qdro-lawyer.com/help/loans.htm
Permalink Submitted by Kirk Halveland on Fri, 2011-02-11 14:56
A follow up question:
Is the amount transferred to the ex-spouse’s IRA from the split 401(k) treated any differently in regards to IRA withdraw rules? She’s wanting to take a qualified withdraw for a new home purchase.
Thanks,
K
Permalink Submitted by mk foss on Fri, 2011-02-11 18:34
If a former spouse takes a withdrawal from a 401k plan pursuant to a QDRO then rolls it to an IRA, he/she can avoid the10% penalty on $10,000 of an IRA distribution for a first time home purchase.
If a former spouse takes a withdrawal from a 401k plan pursuant to a QDRO and does NOT roll it to an IRA, there is no 10% penalty regardless of what the funds are used for.
There will be income tax on any 401k or IRA distribution but there is no 10% penalty on QDRO payments direct from the 401k plan.