Funds From a 401(k) Can Be Tax Free
What is the best financial incentive to transfer investments from one spouse to the other? The tax code allows a spouse to withdraw monies from a 401(k) without penalty?
Yes, investments of this type can be divided by transferring a portion of the assets from one spouse to the other by a QDRO as part of a divorce.
26 U.S.C. 72(t)(2)(C)
Note that the penalty-free (but not tax free) withdrawal is available only to the recipient spouse and not to the 401(k) holder. In addition, the withdrawal has to be made as part of the transfer from the 401(k). If the recipient spouse rolls the funds into his/her own IRA and then withdraws them the penalty will be incurred (as well as taxes) on the IRA withdrawal.
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