Advanced Underwriting Consultants

Ask the Experts – February 28

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.[1] However, like the 401(k), an IRA distribution will still generally be subject to ordinary income tax treatment.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.



[1] See I.R.C. §§ 414(p)(9), 401(a)(13), 408.