Tax consequences of liquidating a 401k
The 10-year average rate of return for the S&P 500 Index was 5.39% annually as of August 2016.During the same period, the Dow Jones Industrial Average returned an average of 5.02% annually. Past performance is no guarantee of future results. *Withdrawals from your qualified plan are taxed as ordinary income and may be subject to a 10% Federal tax penalty if taken prior to age 59 1/2.When the QDRO is signed by the court, it allows your plan provider to transfer a portion of your 401(k) to your ex without penalties or taxes consequences.
However, if you've made nondeductible contributions to your traditional IRA, those aren't taxed when you withdraw them.
Most plan administrators are exacting about the language that must be included in a QDRO, and the language is usually unique to each particular plan provider.
You'll have to make sure your QDRO contains the correct wording so your plan provider will accept it, then have the divorce court judge sign it.
As long as your QDRO provides for the transfer and allows her to do this, neither of you would be subject to the 10 percent penalty if she cashes in rather than rolls over, assuming she does it immediately without reinvesting the funds.
Beverly Bird has been writing professionally since 1983.