Get money from a 401k with no penalty

Karen's divorce decree awarded her $300,000 from her husband's 401k. She could transfer the money to an IRA and pay no taxes on this amount until she withdraws funds from the IRA. But Karen needed $80,000 to pay off credit cards and other debt. Because the 401k plan withholds 20% to pay taxes, she needed to ask for $100,000.

The 401k plan withheld $20,000, sent Karen $80,000 and transferred the remaining $200,000 to her IRA. The IRS says that any money received from a qualified plan, such as an 401k, in a divorce situation only, can be spent without penalty, even if the recipient is under age 59-1/2.

Karen does have to pay the taxes on the entire amount of $100,000 but she did not have to pay the 10% early withdrawal penalty. There are specific guidelines in accomplishing this without having to pay the 10% penalty so a divorcing person needs to seek the guidance of a financial professional.

After the money from a pension plan goes into an IRA, which is not considered to be a qualified plan, Karen is held to the early withdrawal rule. If she says, “Oh I forgot, I need another $5,000 to buy a car,” it is too late. She will have to pay the 10% penalty and the taxes on the moneys taken out of the IRA.