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Dorothy Rosen -- The Dollar Diva Ask the Dollar Diva

Claiming half of your ex's 401(k) after the divorce

Dear Dollar Diva,
My ex-husband is required to give me one half of his 401(k) plan as part of our divorce settlement. Is there any way this can be treated as a rollover so as to avoid paying taxes on the distribution?

Dear Barbara,
Yes, the distribution can be rolled over tax-free into a traditional rollover IRA, but you'd better make sure it's done right or you (not your ex-husband) will end up holding the bag for the taxes due.

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In order for the rollover to be tax-free, it needs to be rolled over under a Qualified Domestic Relations Order (QDRO). A QDRO is a court order saying that you are entitled to half of your husband's 401(k) plan. It must include:

  • Your husband's name, address and Social Security number as the participant; your name, address and Social Security number as the alternate person to receive the benefits.
  • How much, or what percentage, you are entitled to receive.
  • When the payments will be made to you.
  • Name of plan(s) to be rolled over.

Timing is everything; make the rollovers too early or too late, and say hello to a hefty tax bite:

  • Wait until the marital agreement is signed, sealed and delivered before making the rollover.
  • Make sure distributions are made within one year of the dissolution of the marriage; after that it's not considered "incident to divorce."
  • Rollovers must be made within 60 days of receiving the distributions.

QDRO must be approved
The court issues a Domestic Relations Order, ordering half the 401(k) plan to go to you; it doesn't become a QDRO until your husband's 401(k)-plan administrator approves it.

It's not a bad idea to have the QDRO pre-approved by the plan administrator before the court enters it. Otherwise, if changes need to be made, the court has to keep re-entering the order until it gets the plan administrator's thumbs up; this can be a time-consuming and expensive process.

For more on QDRO rollovers, read IRS Publication 575, Pension and Annuity Income.

-- Posted: Jan. 28, 2002

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See Also
Your credit rating after a divorce
Tax planning for the suddenly single

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