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I received $15k from my spouse's 401k as part of a divorce…

I received $15k from...

I received $15k from my spouse's 401k as part of a divorce settlement. How would I treat that for tax purposes? Is it the same as alimony, or is it like a distribution from an IRA/401k where I would have to roll it over to another IRA/401k to avoid early withdrawal penalty?

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6/25/2018
Chad EA, CDFA®, CFP®
Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional
Category: Tax
Satisfied Customers: 2,768
Experience: IRS Licensed Enrolled Agent, CDFA ® CFP ®, MBA
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Hello!

My name is***** will assist you today.

Please give me one moment while I review your question and type my initial response

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You should be given the option to roll the funds from the 401K over to an IRA to avoid withholding or tax. --When the funds are distributed directly to you from a 401K the plan administrator of the 401K must withhold 20%.--This 20% would be taxable to you.

Lump sum payments from a retirement account are generally not alimony. Alimony should be clearly defined in your divorce settlement paperwork

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If you do have the funds distributed directly to you, then you would have 60 days to roll the funds over to an IRA or the distribution will be taxable to you.

Generally, when assets are dispersed via a QDRO, the 10% early withdraw penalty does not apply, if you are under 59 1/2

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Please let me know if this answer has helped or if you have any additional follow up questions.

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Customer reply replied 1 month ago
let me see if I understand, if I roll the funds into an IRA within 60 days I will not have to pay any penalty or tax. is that correct?

That is correct.

The most efficient way to do this, is by having the amount transferred directly from his 401K to your IRA. This is referred to as a "trustee to trustee" transfer

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If you don't do a trustee to trustee transfer, the 401K plan administrator will withhold 20% from the payment and you will be taxed on that 20% even though you don't receive it.

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Customer reply replied 1 month ago
I don't have an IRA, but I would have 60 days to start one with this distribution, and still be able to avoid penalty, correct?

Correct.

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The key is to roll the funds into the new ira within 60 days of the distribution from the 401K

Chad EA, CDFA®, CFP®
Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional
Category: Tax
Satisfied Customers: 2,768
Experience: IRS Licensed Enrolled Agent, CDFA ® CFP ®, MBA
Verified
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Customer reply replied 1 month ago
I was fairly certain that was the case, but wanted to be sure. Thanks.

When you have no further questions please take a moment to accept the answer by clicking on the ***Stars*** so I am credited for my work. A positive rating of 5 stars is much appreciated.

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