Have a Tax Question? Ask a Tax Expert
Thank you for your question and for using justanswer.com.
Assets distributed from a qualified plan in accordance with a qualified domestic relations order (QDRO) are exempted from the 10% early-distribution penalty but you will be subject to tax withholding even if you are under age 59½. To avoid the penalty, the following criteria must be met:
(1) The retirement plan must be a qualified plan covered by ERISA (e.g. 401K and other Defined Contribution Plans);
(2) The funds must be paid to an alternative payee, not the owner of the account; and
(3) A Qualified Domestic Relations Order (QDRO) must be created and used to divide the plan
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. The amount paid is taxable income to you, so you will pay as if it is normal income to you in your normal tax bracket.