Can I Withdraw Money From A Retirement Account In A Divorce?

Spouses involved in divorces frequently have an immediate need for cash at the time their divorce is finalized. This may be prompted by the need to pay bills or make a down payment on residence. Often, the only significant assets of parties at the conclusion of divorce are funds in employer-sponsored qualified retirement accounts. These include 401(k)s or other defined contribution plans. A lack of any significant non-retirement assets often leads spouses to seek a withdraw from a retirement account.

In these instances, the 401(k)s or other qualified retirement accounts will be divided between the parties. The party receiving funds from a spouse’s retirement account is known as the “alternate payee.” There are no tax consequences or penalties at the time of the transfer, provided conditions are met. The parties must obtain a Qualified Domestic Relations Order (“QDRO”) from the court. The funds must also be rolled into an Individual Retirement Account (“IRA”) in the name of the alternate payee.

A QDRO allows the withdraw of money from the qualified retirement account penalty-free.

This is a one time-opportunity for the alternate payee spouse only. Generally, the owner of a qualified retirement account must wait until the age 59½ to receive distributions. A withdraw prior to that date will yield a 10% penalty, in addition to the federal and state taxes owed.

In divorce cases, however, the Internal Revenue Code carves out an exception to the 10% penalty rule.

Prior to rolling funds into an IRA, an alternate payee only can request a partial or total cash distribution of their share of the qualified retirement account. The alternate payee is still required to pay taxes on the distribution, but will not incur the 10% penalty. It is important to note that each financial institution drafts its own rules and regulations governing its retirement accounts. Therefore, this option might not be available with every retirement plan.

The attorneys at Cooley & Handy can help you investigate this and other options to help secure your financial future following your divorce.