I am getting half of my exhusbands 401(k) via QDRO within the next 2 weeks. Most of that money that I receive I will give to my ex for a buy out of our house. I understand because the distribtuion is via a QDRO, that BOX 7 on the 1099R will be listed with a "2" exception, meaning I am not subject to the 10% early withdrawal penalty. I understand that I will have to pay the taxes though. What happens though if I have a few thousand dollars left over after I pay off my ex, that I want to roll over. Would I be able to roll the "extra " money over & what about the taxes that were withheld on the entire distribtuion.


ALso, another thought. I am assuming that I only get out of the 10% penalty (exception code "2") if the payment is made in a lump sum to me. In other words, if I transferred my entire portion from ex's 401K to an IRA in my name, then just liquidated the amount that I owe my ex, I am assuming that the distribution code on the 1099-R would be premature distribution, & I would be responsible for the taxes & the 10% early withdrawal penalty, I do not believe once the funds are transferred to my name, that I would be allowed to then distribute to the ex & have it coded as a dsitribution via QDRO.


Please let me know your thoughts

You are correct. Once the funds are rolled to an IRA, they lose the QDRO exception to penalty.

If you have money left over, you can roll it to an IRA if you are within 60 days of the QDRO distribution. However, due to mandatory withholding, you will need some extra funds to complete as much of the rollover as possible.

You may want to check with the plan administrator to see if they will do a direct rollover with part of the plan proceeds, and that will eliminate the withholding on that portion. The rest would be paid to you and subject to 20% withholding.

Depending on how you are paying taxes up to this point, you can reduce your other withholding sources or back off on quarterly estimates if the withholding is more than your expected tax liability for 2008. Otherwise, you will get your tax refund the earlier you file for 2008.