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What percentage of taxes will I pay if I cash out my half of my ex husbands 401k and will I be taxed twice?

A QDRO has already been filed. It was almost 3 years ago. Rue person that was working on it for some reason stopped. I need to let her know if I want to roll it over or cash out. I really need the money but don't want to pay taxes twice.

Jun 15, 2014 by Tammie from Ceres, CA in  |  Flag
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Rich Winer Level 20

Under the normal retirement plan distribution rules, if you are under 59 1/2, you will be taxed on whatever you withdraw, plus the amount of your withdrawal will be subject to a 10% early withdrawal penalty. If you are over 59/ 1/2, you would only be subject to taxes (no penalty).

There is a way to take withdrawals prior to 59 1/2 without penalty under Section 72(t) of the IRS code. It requires that you set up a series of "substantially equal periodic payments." There are restrictions and complexities to this process, so you will likely want to work with a financial advisor or your CPA to make sure you do things properly. Once you come up with a payment schedule, you must stick with it, or your withdrawals with be subject to taxes and the 10% penalty.

Hope this helps.

3 Comments   |  Flag   |  Jun 15, 2014 from Woodland Hills, CA
Rich Winer

P.S. It's rarely a good idea to tap any retirement plan prior to retirement. It should generally be your last resort for needed funds. If your can avoid using your retirement plan funds now, invest the funds wisely and can hold out until retirement, you'll be glad you did.

Flag |  Jun 15, 2014 near Woodland Hills, CA
Rich Winer

CORRECTION: I just learned something new. Thank you, Michael. If you withdraw money from your ex-husband's retirement plan under a QDRO and do not roll the money to an IRA, the money you withdraw would not be subject to the 10% IRS penalty for withdrawals prior to age 59 1/2. It would still be subject to income taxes. However, if you roll the money to an IRA and then try to take a withdrawal, it would then be subject to the 10% penalty.

Flag |  Jun 16, 2014 near Woodland Hills, CA
Michael V Mezheritskiy

Rich, we can't know everything about everything glad I could help, have a great rest of the week!

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Flag |  Jun 16, 2014 near Farmington, CT

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1 vote

Tammie, if you received this 401k as a QDRO settlement, it will not be subject to a 10% penalty on distributions. only taxes. QDRO and Beneficiary non spousal pay out are not subject to a 10% penalty! the other question if its a good idea, I would suggest sitting down with a local RIA to see what alternative you might have. You do not need 72t as mentioned in the answer above, once again if you received a 401k plan as a QDRO proceeding there is no early withdrawal penalty on it here is the link : http://www.irs.com/articles/qualified-domestic-relations-order-qdro Here is the paragraph: With most QDROs, the person known as the alternate payee (not the primary holder) is taxed when the funds are withdrawn from the account. It is important to note that the 10% early distribution penalty does not apply here. Let me know if you have any questions, Best of Luck Michael

2 Comments   |  Flag   |  Jun 16, 2014 from Farmington, CT
Tammie

What would the taxes be? I was told it's based on my tax bracket. I'm in the lowest tax bracket so how would I figure it out?

Flag |  Jun 18, 2014 near Ceres, CA
Michael V Mezheritskiy

Tammie the best approach here would be to speak with a CPA. Taking money from a retirement account is like getting a paycheck from work. So your income tax bracket most likely is going to go up, that is why it's a good idea to meet with a CPA to have him/her give you an estimate. It might make sense, depending on the amount of distribution, to maybe spread it over 2 years to minimize taxes. I hope this helps, best of luck. Let me know if you have any other questions.

Flag |  Jun 18, 2014 near Farmington, CT

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Similar to what has been said, if you need the funds then you need the funds. That being said, if you are under 60 years old, you should try and wait to take the funds to avoid any penalties.

1 Comment   |  Flag   |  Jun 16, 2014 from King of Prussia, PA
Cassandra

What if the funds were used to purchase a primary residence for the spouse and dependent. I am in the middle of a divorce and waiting on a QDRO myself. Once I receive those funds I had planned on purchasing a home since my Ex will be getting our previous residence.

Flag |  Feb 14, 2018

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