In most cases, it is possible to cash out your interest in your former spouse’s retirement plan via Qualified Domestic Relations Order (QDRO). A QDRO is a legal document used in a divorce or legal separation to split retirement plans without tax penalties.
Here’s what you need to know about cashing out your QDRO:
There May Be Tax Penalties
If you are younger than 59 ½, you will not be subjected to the 10% federal tax penalty. However, you will still be required to pay taxes on the money you pull out.
You are required to pay ordinary taxes based upon your personal tax bracket, which is based on your income level. The plan administrator will deduct 20% of your payable funds for estimated taxes. Your actual taxes are established once you file your tax return.
Depending on the income tax bracket you fall in, the 20% may be a higher or lower estimation which will result in a refund or added tax liability.
If the Money Goes Into an IRA, You Can’t Avoid Tax Penalties
Once the money goes into an Individual Retirement Account (IRA), you will not be able to cash out without paying a 10% early distribution penalty if you are younger than 59 ½ years old. If you need some of the money right away, it may be a good idea to leave some of the money out, rather than distributing all of it into an IRA. Funds from an IRA are paid to you over time.
If you need help with your QDRO or have other questions related to divorce, our team is here to help. We have helped many others in similar situations, and we’re prepared to help you too.