Ask the Experts!
The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers. Here’s the question of the day.
Question: My client, age 45, received half of each of her ex-husband’s IRA and 401(k) accounts pursuant to a divorce settlement. If she withdraws all the funds from both accounts, will she incur the 10-percent penalty on the proceeds?
Answer: The rules are different based on the type of plan.
The proceeds from the 401(k) account will not be subject to the 10-percent penalty as long as the plan was split pursuant to a qualified domestic relations order (QDRO). The distributions will still generally be subject to ordinary income taxes—just not the penalty.
On the other hand, a distribution from the IRA will be subject to the 10-percent penalty unless another exception applies (e.g., disability, SEPP plan, medical expenses) since QDROs don’t apply to IRAs. However, like the 401(k), an IRA distribution will still generally be subject to ordinary income tax treatment.
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 See I.R.C. §§ 414(p)(9), 401(a)(13), 408.