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Bill
Bill, Enrolled Agent
Category: Tax
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Experience:  EA, CEBS - 34 years experience providing financial advice
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I was recently divorced (June 08). In late July I received

Customer Question

I was recently divorced (June '08). In late July I received money from my ex-husband's 401K under a QDRO. By the time the money was transferred to my alternate payee account, the stock market had begun it's downward spiral and I have subsequently lost about a third of the QDRO money.   It's more beneficial to me from a tax standpoint if I withdraw the money this year, but waiting until 2009 or later may allow it to regain some of what I lost. My question: is there a time limit from the date the QDRO is approved by the court within which I HAVE TO withdraw money from this 401K? I understand that I'll pay tax on the distribution, but I want to avoid the 10% penalty. I read the IRS pubs and can't find the answer to my questions. I believe that I had only 60 days within which to roll the money into another IRA and keep it tax sheltered. Thanks.
Submitted: 5 years ago.
Category: Tax
Expert:  Bill replied 5 years ago.

There is not a specified time limit that you have to withdraw the funds from the 401(k) plan unless the QDRO or the plan document specifiy otherwise. If you take a distribution directly from the 401(k) you will not be subject to the 10% penalty because there is an exception for distributions in accordance with QDROs. However, if you roll the funds over to an IRA and then take a distribution from the IRA, the distribution from the IRA will be subject to the 10% penalty (unless some other exception applies).

 

See page 30 under "Additional exceptions" second bullet point - http://www.irs.gov/pub/irs-pdf/p575.pdf

 

Customer: replied 5 years ago.

Is it always the case that you have only 60 days to roll over into an IRA or does that vary by QDRO administator? The tax document on my ex-husband's 401K web site seemed to indicate a 60 day limit (which is rather short and already passed in my case). So I think my only options are to hold it in his company 401K funds or to take a distribution at some point.

 

Thanks

Expert:  Bill replied 5 years ago.

If the rollover is being made directly to an IRA from the 401(k) plan then the 60 day rollover period does not apply because the check is made payable directly to the IRA trustee, not to you. However, if the distribution is made directly to you and payable to you then you will only have 60 days to roll it over to an IRA. In addtion, if the check is made payable to you then the 401(k) plan is required to withhold 20% for federal income taxes. The 20% withholding requirement is required on all distributions that are sent directly to participants or alternative payees, it is not a penalty tax.

You also have the option of having some of the funds sent directly to you and the balance rolled over to an IRA. The 20% withholding will only apply to the funds sent directly to you.

Bill, Enrolled Agent
Category: Tax
Satisfied Customers: 3078
Experience: EA, CEBS - 34 years experience providing financial advice
Bill and other Tax Specialists are ready to help you
Customer: replied 5 years ago.
Thank you so much for your fast and easy to understand answers!! I really appreciate it! Why is this so hard to find in the IRS publications?
Expert:  Bill replied 5 years ago.
You're welcome. Thank you for using Just Answer.

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