She Pulled Cash From His $900,000 401(k) at 51 With No 10% Penalty. The One Divorce Rule That Waives the Under-59½ Tax the IRS Enforces on Everyone Else.
In a divorce where one spouse is under 59½, the receiving party can withdraw cash from the ex-spouse's 401(k) without incurring the standard 10% early distribution tax penalty. This is possible through a Qualified Domestic Relations Order (QDRO), a separate court order that instructs the retirement plan to pay a portion of the participant's benefit to the alternate payee, typically a spouse or ex-spouse.
The plan administrator must review and approve the QDRO before any distribution can be made. Once the plan accepts the QDRO, the alternate payee can request a distribution directly from the plan, exempt from the additional tax that usually applies to withdrawals before age 59½. However, this exception only applies to qualified employer plans such as 401(k), 403(b), pension, profit-sharing, and similar plans governed by ERISA.
If the funds are held in an IRA, SEP, or SIMPLE, the QDRO penalty exception does not apply, regardless of the court order.
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