Using QDRO Money From a Divorce to Pay for a New Home

It's important to understand the tax implications

Updated February 12, 2025

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A qualified domestic relations order (QDRO) is a court order that divides the assets that are in certain retirement plans, including 403(b)s and 401(k)s. Before using the money to buy a house, y🌟ou should first c𒐪onsider the tax implications.

Key Takeaways

A qualified domestic relations order (QDRO) is a court order used to divide certain retirement-specific assets during a divorce.
Assets distributed from a qualified plan under a QDRO are exempt from the 10% early withdrawal penalty.
Any money distributed directly to an ex-spouse will be subject to mandatory withholding tax.

Can You Use a QDRO to Buy a House?

Funds distributed from a qualifi꧅ed plan under a QDRO can be used to buy a home, but you should unders♉tand the payment options and tax implications.

Assets distributed from 澳洲幸运5官方开奖结果体彩网:a qualified plan under a QDRO are exempt from the usual 10% 澳洲幸运5官方开奖结果体彩网:early withdrawal penalty set by the Internal Revenue Service (IRS).

Recipients can opt to have a portion of the amount processed as a 澳洲幸运5官方开奖结果体彩网:direct rollover to their 澳洲幸运5官方开奖结果体彩网:traditional individual retirement account (ꦺIRA) and the balance paid to them to buy a home. The amount processed as a direct rollover to an IRA will not be subject to 澳洲幸运5官方开奖结果体彩网:withholding tax.

Important

Any amounts that you receive directly (instead of 澳洲幸运5官方开奖结果体彩网:rolling over to a retirement plan) will be subject to mandatory withholding tax. This withholding can include 20% for federal taxes held by the plan and an additional amount for state taxes, depending on the state.

Distribution Options

Assets can be rolled over to a traditional IRA and have the distributions paid over time. Amounts paid to recipients for at least five years or until age 59½, whichever is longer, are exempt from the 10% early-distribution penalty, provided the payments meet certain requirements. This option is commonly referred to as substantially equal periodic payments or 澳洲幸运5官方开奖结果体彩网:72(t) distributions.

To convert the assets to a Roth IRA, beneficiaries must first roll over the funds to a traditional IRA. The funds can then be converted from the traditional IRA to the Roth IRA. However, taxes will be owed on the converted amount for the year the conversion occurs. Then, in ret𝔉irement, wi꧅thdrawals will be penalty- tax-free, as long as you're at least 59 ½ years old and have had the Roth account for at least five years.

Warning

Some qualified retirement plans will not distribute assets under a QDRO until the plan participant—in this case, a former spouse—experiences a triggering event, such as reaching retirement age or leaving an employer. Plans may also consider the QDRO a triggering event.

Are There Exceptions to the 10% Early Withdrawal Penalty for IRAs and 401(k)s?

When an individual withdraws from an IRA or defined-contribution retirement plan before age 59½, these early distributions trigger a 10% early withdrawal tax unless an exception applies. Some exceptions include paying for qualified medical expenses or higher education costs. For more exceptions, visit the IRS website.

Which Retirement Plans Are Subject to a QDRO?

A qualified domestic relations order (QDRO) is a court order used to divide specific types of retirement plans, including qualified plans, such as 401(k) and 403(b) plans. A QDRO must comply with the 澳洲幸运5官方🉐开奖结果体彩网:Employee Retire🔜ment Income Security Act (ERISA). ERISA provides a regulatory framework for employer-sponsored retirement plans to protect participants and their 澳洲幸运5官方开奖结果体彩网:beneficiaries. IRAs are not subject to ERISA and are divided using a "transfer incident to divorce."

Can There Be Additional Beneficiaries Named on a QDRO?

Other than an ex-spouse, dependents may qualify to receive the ordered benefits. In such instances, the alternate payee is a minor or is determined to be legally incompetent. The order can require the benefit plan to make a payment to an individual with legal responsibility for that payee. This can include a guardian or trustee who serves as the agent of the individual.

The Bottom Line

Retirement assets need to be 澳洲幸运5官方开奖结果体彩网:address🍨ed separately during divorce proceedings. Although money can be disbursed to help pay for the purchase of a home, you should consider how and when to use these funds when considering tax penalties.

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