Does the 10% Early Distribution Pentaly Apply to QDRO Divorce Payments from Solo 401k Plans?

QUESTION:

My husband an I recently divorced. As is typical, half of my solo 401k got awarded to him pursuant to a qualified domestic relations order (QDRO). If he elects to take his portion from the solo 401k as a distribution instead of rolling it over to an IRA or another 401k plan, will he have to pay the 10% early distribution penalty since he is under age 59 1/2?

BACKGROUND:

A QDRO is a judgment, decree, or order relating to payment of child support, alimony, or marital property rights to a spouse, former spouse, child, or other dependent of a participant in a retirement plan including a solo 401k plan.

The QDRO must contain certain spe-cific information, such as the name and last known mailing address of the participant and each alternate payee, and the amount or percentage of the participant’s benefits to be paid to each alternate payee. A QDRO may not award an amount or form of benefit that isn’t available under the solo 401k plan.

A spouse or former spouse who receives part of the benefits from a retirement plan including a solo 401k plan under a QDRO reports the payments received as if he or she were a plan participant. The spouse or former spouse is allocated a share of the participant’s cost (investment in the contract) equal to the cost times a fraction. The numerator of the fraction is the present value of the benefits payable to the spouse or for-mer spouse. The denominator is the present value of all benefits payable to the participant.

A distribution that is paid to a child or other dependent under a QDRO is taxed to the plan participant.

ANSWER:

Taxes and penalties does not apply to QDRO funds that are transferred to another 401k plan or directly rolled over to an IRA. In the case where the alternate payee is the former spouse and he or she elects to take a distribution, unlike IRAs, no the 10% early distribution penalty does not apply from a qualified retirement plan such as a solo 401k plan to an alternate payee under a qualified domestic relations order. This rule is outlined in IRS Publication 575.

 

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

  • About MySolo401k

    We help our clients take control of their retirement money. Our products and services provide our clients the freedom to invest their retirement savings in their own business as well as alternative investments such as real estate, private companies, promissory notes, precious metals, tax liens and equities.
    Learn more

    Connect with us

  • We’re here to help.

    Call: 800-489-7571

    Monday-Saturday

    7:00 am - 5:00 pm PT

    Why us?
MENU