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How Can an Alternate Payee Get Cash From a 401k Without Penalty?

Internal Revenue Code 72(t) imposes the 10% penalty on early withdrawals (that is, withdrawals before the plan Participant has reached the age of 59 ½  ).  Sec. 72(t)(2) lists a number of exceptions for the imposition of the penalty. Sec. 72 (t)(2)( c ) says that the 10% penalty does not apply with respect to distributions to the Alternate Payee under QDRO as defined by Section 414(p)(1).

The Alternate Payee may roll the whole distribution into another qualified plan or IRA, roll some/cash some, or take the whole distribution as cash. This is a one-time opportunity: once the funds are rolled into another plan, the money is no longer being distributed “under a QDRO” but rather is the Alternate Payee’s own money. If none of the other listed exemptions apply and the Alternate Payee is not 59 ½  , the funds would be subject to the 10% penalty.

Any funds taken as cash will be included in the Alternate Payee’s regular income. Some plans will withhold 20% up front, so consider asking what the plan’s procedures are before  deciding how much to withdraw—the Alternate Payee will receive a 1099 and any extra taxes will be refunded when the he or she files a tax return.