QDRO Penalty Exception Rule – Rollover to IRA
In a divorce situation, where a 401(k) account is split according to QDRO, the non-participating spouse is allowed to take a distribution and avoid the 10% penalty if done directly from the plan. If the plan has an “all or none” provision on distributions, meaning they do not allow a cash distribution and a rollover distribution to an IRA at the same time; can the spouse take the entire distribution in cash and then utilize the 60-day rollover provision to put the unused balance into her/his IRA account (I am not worried about the mandatory withholding)?
Mike
Permalink Submitted by Alan - IRA critic on Thu, 2025-05-29 11:20
Yes, that could be done, but is far from ideal if the spouse is not very close to age 59.5.
The alternate payee would have only one total distribution free of penalty, would need to have other funds available to replace the withholding taken on the intended rollover amount, and if the portion retained was large enough to meet all spending needs until age 59.5, it would probably increase the marginal tax rate for that year, offsetting some of the benefit of the penalty waiver. This is a very similar situation to how the age 55 separation penalty exception works when the plan will not provide flexible distributions and the participant is forced to take a total distribution and then roll over the portion they do not need.
The potential solution for both situations is to roll over the entire plan to an IRA and initiate a 72t plan from the IRA.
Permalink Submitted by Michael Burroughs on Thu, 2025-05-29 11:52
Thank you – I agree – not ideal!