QDRO and Roth 401k
I have a client that has a 401k that contains both pre-tax and Roth 401k contributions (under 59.5). He would like to assign the Roth 401k portion of the account to his wife as part of the property settlement. Can she distribution these funds penalty and tax free as part of the QDRO?
Permalink Submitted by Alan - IRA critic on Wed, 2025-04-30 13:56
It depends on whether the Roth 401k is qualified or not. Until it is qualified (5 years and age 59.5), any distributions will include a pro rata amount of gains and the gains will be taxable. But there is no early distribution penalty for distributions taken directly from the plan.
If the Roth 401k can be directly rolled into a Roth IRA, the Roth IRA ordering rules will apply and the gain comes out last with the Roth 401k contribution basis coming out tax and penalty free. However, if gains are distributed from the Roth IRA before it is qualified, those gains will be subject to both tax and penalty if the alternate payee is not yet 59.5.
Note that a QDRO cannot change the distribution options that are available to the participant and that might affect a direct rollover to a Roth IRA.