When couples get divorced, assets are usually divided. However, that split doesn’t automatically extend to retirement plans. This is where a qualified domestic relations order (QDRO) can come into play. A QDRO is a court order used to divide specific types of retirement plans, including qualified and 403(b) plans. There are several issues to consider in using QDRO money to pay for a house, including the lack of an early distribution penalty and federal tax withholding. Here is a closer look at these issues:

According to the Internal Revenue Service, a QDRO is “a judgment, decree or order for a retirement plan to pay child support, alimony or marital property rights to a spouse, former spouse, child, or another dependent of a [retirement plan] participant.”

The Early Distribution Penalty

Assets distributed from a qualified plan in accordance with a qualified domestic relations order (QDRO) are exempted from the usual 10% early-withdrawal penalty. So if you are under age 59½ and want to use any portion of the assets immediately, it may be practical not to roll over that portion of the assets to an IRA. Funds rolled over to a Traditional IRA and then distributed from that IRA will be subject to the 10% to the 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 will be subject to mandatory withholding. This withholding is 20% for federal taxes and, depending on your state of residence, the payer 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 financial needs for that home.

Distributions May be Taken Over a Certain Period

Unless you need some of the money 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 59½ (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.

Several 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. Some plans consider a QDRO a triggering event.

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 the Roth IRA. You will owe taxes on the converted amount for the year the conversion occurs.