Withdraw IRA with QDRO after divorce – non-US residents
Hello,
I have a tax/legal/assets issue and would appreciate some suggestions.
In 2017 my husband and I signed our divorce papers, essentially splitting our common assets which included a 401k. This 401k has since been rolled over into an IRA (the year following the official divorce). It is important to note we are French and at the time were residents in the US, but since then have both returned to France and are no longer US residents.
Around 2019 we began discussions about how to best split this IRA, since the main issue is that early withdrawals are subject to a 10% penalty, in addition to income taxes.
At first we contacted a lawyer to draw up a QDRO, which would technically allow us to withdraw from a retirement plan being exempt from the early withdrawal penalty since the withdrawal was done in the case of a divorce. However we were poorly informed, and this QDRO apparently only applies to a 401k, but not for an IRA.
The next suggestions which was made to us is for me to open an IRA in the US, and for half of the funds from my ex-husband’s IRA to be transferred there. At least this would allow us to separate the funds, although they would still be subject to an early withdrawal fee in case I wish to withdraw them. The problem here is I am no longer a US resident since I live in France, and after contacting many different banks, none of them allow creating an IRA for a non-US resident.
So currently, we see no other solution than for my ex-husband to initiate an early withdrawal of half the IRA, pay the income taxes and early withdrawal fee and transfer them to me. But this option is quite costly and penalizing since we are withdrawing in the case of a divorce (with a qdro).
My questions are as follow:
1. Since the funds were in a 401k at the time of the divorce, is it possible to use the QDRO to withdraw exempt from the early withdrawal fee even though it has since then been rolled over to an IRA?
2. Is it truly impossible to open an IRA without being a US resident? (Even in the case of a divorce?). None of the main investment banks I’ve contacted would work with France (some in Europe but not France).
3. Is there another way to be exempt from the early withdrawal fees, since this is in the case of a divorce (with qdro)?
To sum up, how can I retrieve my share of the investment plan since although the judge orderered it, it seems technically impossible.
Any suggestions/solutions would be greatly appreciated.
Thanks!
Permalink Submitted by Alan - IRA critic on Fri, 2021-05-14 15:58
Unfortunately, no. The penalty exception only applies to distributions directly from a qualified plan (401k), not from an IRA. The 401k no longer exists, since it was rolled over to an IRA.
Can’t answer this as I am not familiar with the international rules. Perhaps if your divorce could be amended to include a “transfer of IRA incident to divorce” order, the IRA custodian would split the account into two accounts, which is a non reportable transfer, not a taxable distribution. You would then each have your own IRA account, but distributions would be subject to the penalty unless the withdrawing party qualified for a different penalty exception. See penalty exception chart here: Retirement Topics Tax on Early Distributions | Internal Revenue Service (irs.gov). Since ex apparently is still the IRA owner he should call the custodian to verify that this transfer would be processed. This would be automatic if current owner was a US resident or citizen, not sure if your residency would alter this.
See chart linked above. If the IRA is split, the chart would apply separately to each former spouse. There is no divorce penalty exception, except for QDRO from a qualified plan (but not from IRA).
There are also mandatory withholding requirements for IRA distributions to non US residents. These rules are affected by the tax treaty between the US Govt and France. Larger French institutions might be aware of those rules.