Cashing retirement fund at time of divorce
I am finalizing my divorce. I expect that the maritial retirement funds will be divided between me and my husband. My attorney thinks that he recalls a tax law that allows a cash out or cash distribution from the retirement funds at the time of the divorce with out penalty. All the retirement funds are in my husband's name. Most are Sep IRA funds such as Janus and Vanguard and one small one is a 401K. Is it possible for me to receive cash from these funds at the time of the divorce and only pay tax but no early withdrawal penalty?
1 Answer from Attorneys
Re: Cashing retirement fund at time of divorce
The SEP-IRA's can be transferred to you free of tax consequences by changing ownership of the accounts pursuant to a divorce decree. Unless you meet one of the exceptions to the 10% penalty (ie. age 59 1/2, etc.), you as the new IRA owner would be subject to both income tax and the 10% penalty upon distribution. There is no exception to the 10% penalty for IRA's on account of divorce.
As for the 401k - it is a "qualified retirement plan". To avoid tax consequences upon it's transfer or distribution to you, it must be handled pursuant to a Qualified Domestic Relations Order (or QDRO). The requirements for a QDRO are very technical and probably require the assistance of a tax expert. Distibutions to you under a QDRO would be taxable (unless you rolled them to your own IRA within 60 days), but WOULD NOT be subject to the 10% penalty for premature distributions. The real person at risk is your husband. If this transaction is not done correctly, he will likely bear the responsibility for the unfavorable tax consequences that could occur.
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