||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?
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
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
- How much, or what percentage, you are entitled
- 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
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