The 10% penalty for distributions prior to age 59 1/2 does not apply to QDRO distributions from a qualified plan (such as a pension or 401(k)) but it does apply to IRA distributions unless another exception applies. So if you rollover the funds to an IRA and then take a distribution you will incur the 10% penalty.
The 20% penalty that you were informed about is not a penalty, it is tax withholding that is required for distributions from qualified plans regardless of a person's age or distribution reason. The taxes that are withheld will be entered as a credit against any taxes you owe when you file your tax return.
So depending on how much you will need to live on until you get another job, you could take a partial distribution for your estimated living expenses and roll the balance to an IRA. The partial distribution amount will avoid the 10% penalty tax.
Another consideration would be to project the amount of tax you will pay if you take the entire distribution this year (including your other income for the year) without the penalty and compare these taxes to how much you would pay in total taxes over 2 years if you take a partial distribution this year and IRA distributions next year for living expenses if you don't obtain another job but pay the penalty with lower overall income next year.
It's possible you could get a refund. It would depend on your other income for the year. If you provide me an estimate of your total income this year (wages, investment earnings, unemployment compensation, any other income) and your filing status then I can give an approximate amount of federal tax you will owe.
You can roll the funds over into another retirement plan such as a 401(k) or 403(b) with your former employer but the IRA provides the most flexibility.
Generally, alimony payments are taxable. However. payments that are designated as "not alimony" are not taxable if there is a provision in your divorce document that states the payments are not deductible as alimony by your spouse and are excludable from your income. You spouse can exclude the payments from income only if you attach a copy of the instrument designating them as not alimony to your tax return.
Assuming the payments are not taxable, then if you withdraw the entire $63,941.50 and file single, then your federal income taxes would be approximately $9,835. So if you took a distribution of the entire amount and 20% was withheld ($12,788) then you would get a refund of almost $3,000.
Another option that might be available if you are going to be paying higher education expenses in 2010, would be to roll some of the funds to the IRA and take withdrawals in 2010 not in excess of those expenses as IRA withdrawals for higher education expenses are exempt from the 10% penalty.
See pages 54 - 55 - http://www.irs.gov/pub/irs-pdf/p590.pdf
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