By Donna M. Cheswick
Distributions from a Defined Contribution Plan before a participant reaches the age of 59 1/2 years of age normally are considered “early distributions” by the Internal Revenue Service. In addition to ordinary income taxes, early distributions are subject to a 10% penalty on the amount withdrawn.
I.R.S. tax regulation (72)(t)(2)C provides that when money is withdrawn in accordance with a QDRO, the recipient can take the distribution without penalty. However, there are various factors to consider if making this choice. Consider the following scenario.
Sarah, age 55, receives one half of her former husband’s 401(k) in the settlement of her divorce pursuant to a QDRO in the amount of $320,000. As a result, she decides to pay her attorney’s fees and make a down payment on a condo for a total cost of $80,000.
Sarah has several options at this juncture: