There are several issues to consider:

  • The early distribution penalty - Assets distributed from a qualified plan in accordance with a qualified domestic relations order (QDRO) are exempted from the 10% early-distribution penalty. If you will be using any portion of the assets immediately, it may be practical not to roll over that portion of the assets to an IRA. If you are under age 59.5, amounts rolled over to a Traditional IRA and later distributed from the IRA will be subject to the 10% early-distribution penalty, unless you meet an exception.

    You could have a portion of the amount processed as a direct rollover to your Traditional IRA and the balance paid to you. The amount that is processed as a direct rollover to your IRA will not be subject to tax withholding.

  • Tax Withholding - Because the qualified plan assets you receive pursuant to a QDRO are rollover eligible, amounts that are paid directly to you instead of to an eligible retirement plan through a direct rollover will be subject to mandatory withholding. This withholding is 20% for federal taxes and, depending on your state of residence, the payor may also withhold amounts for state taxes. Therefore, you may need to increase the distribution amount to ensure that the net amount you receive is sufficient to meet your immediate financial needs.

  • Distributions may be taken over a certain period - Unless you need to distribute some of the assets immediately, you may choose to roll over the assets to your Traditional IRA and have the distributions paid to you over time (from the IRA). Amounts paid to you for at least five years or until you are age 59.5 (whichever is longer) are exempted from the 10% early-distribution penalty, provided the payments meet certain requirements. This is commonly referred to as substantially equal periodic payments or 72(t) distributions. If you decide to consider this option, you'll need to know the amount you would receive each year and decide whether this amount meets your requirements.

  • Converting the asset to a Roth IRA - If you want to convert the assets to a Roth IRA, you must first roll the amount to a Traditional IRA. The amount may then be converted from the Traditional IRA to your Roth IRA. You will owe taxes on the converted amount for the year the conversion occurs.

  • Caution - Some qualified plans will not distribute assets pursuant to a QDRO until the plan participant, in this case your former spouse, experiences a triggering event, such as reaching retirement age or being separated from service with an employer. Other plans consider a QDRO a triggering event. Check with the plan regarding its rules for processing distributions due to a QDRO.

This question was answered by Denise Appleby
Contact Denise)

  1. When can catch-up contributions start?

    Most qualified retirement plans such as 401(k), 403(b) and SIMPLE 401(k) plans, as well as individual retirement accounts ... Read Full Answer >>
  2. Who can make catch-up contributions?

    Most common retirement plans such as 401(k) and 403(b) plans, as well as individual retirement accounts (IRAs) allow you ... Read Full Answer >>
  3. Can you have both a 401(k) and an IRA?

    Investors can have both a 401(k) and an individual retirement account (IRA) at the same time, and it is quite common to have ... Read Full Answer >>
  4. Are 401(k) contributions tax deductible?

    All contributions to qualified retirement plans such as 401(k)s reduce taxable income, which lowers the total taxes owed. ... Read Full Answer >>
  5. Are 401(k) rollovers taxable?

    401(k) rollovers are generally not taxable as long as the money goes into another qualifying plan, an individual retirement ... Read Full Answer >>
  6. Are catch-up contributions included in the 415 limit?

    Unlike regular employee deferrals, catch-up contributions are not included in the 415 limit. While there is an annual limit ... Read Full Answer >>
Related Articles
  1. Retirement

    Two Heads Are Better Than One With Your Finances

    We discuss the advantages of seeking professional help when it comes to managing our retirement account.
  2. Retirement

    5 Secrets You Didn’t Know About Traditional IRAs

    A traditional IRA gives you complete control over your contributions, and offers a nice complement to an employer-provided savings plan.
  3. Retirement

    Using Your IRA to Invest in Property

    Explain how to use an IRA account to buy investment property.
  4. Retirement

    How a 401(k) Works After Retirement

    Find out how your 401(k) works after you retire, including when you are required to begin taking distributions and the tax impact of your withdrawals.
  5. Retirement

    Read This Before You Retire in the Philippines

    The Philippines has a warm climate, a low cost of living and plenty of people who speak English. What to do next if you think you want to retire there.
  6. Insurance

    How Life Insurance Works in a Divorce

    Learn the implications of life insurance in a divorce situation, and identify the steps you should take to ensure your policies are sorted out post-divorce.
  7. Retirement

    4 Books Every Retiree Should Read

    Learn more about the current financial situations retirees are facing and discover four books that every prospective and current retiree must read.
  8. Retirement

    Are Fees Depleting Your Retirement Savings?  

    Each retirement account will have a fee associated with it. The key is to lower these fees as much as possible to maximize your return.
  9. Savings

    How Parents Can Help Adult Children Buy a Home

    Owning a home isn't easy thanks to stringent lending standards. Thankfully, there's ways parents can help their kids buy a home.
  10. Retirement

    Retirement Tips for Doctors

    Learn five tips that can help physicians get back on schedule in terms of making financial preparations they need to retire.
  1. Taxes

    An involuntary fee levied on corporations or individuals that ...
  2. W-2 Form

    The W-2 form reports an employee's annual wages and the amount ...
  3. Qualified Longevity Annuity Contract

    A Qualified Longevity Annuity Contract (QLAC) is a deferred annuity ...
  4. See-Through Trust

    A trust that is treated as the beneficiary of an individual retirement ...
  5. Enterprise Investment Scheme (EIS)

    A UK program that helps smaller, riskier companies to raise capital ...
  6. Backdoor Roth IRA

    A method that taxpayers can use to place retirement savings in ...

You May Also Like

Trading Center