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Tax consequences of liquidating a 401k

This means you will pay tax on previously untaxed amounts, but you won't pay the 10 percent penalty.

These include distributions for qualified higher education costs for you or a dependent, health insurance premiums if you are unemployed, nonreimbursed medical expenses that exceed a certain threshold and the cost of a first home for you, your child, grandchild or parent up to ,000.

For a Roth IRA, you can always withdraw your own contributions tax and penalty-free, and your entire distribution will be tax-free if you've reached age 59 1/2 and had the plan for five years.

This article shows how one or both spouses can avoid the 10% early withdrawal penalty.You'll have to make sure your QDRO contains the correct wording so your plan provider will accept it, then have the divorce court judge sign it.When the QDRO is signed by the court, it allows your plan provider to transfer a portion of your 401(k) to your ex without penalties or taxes consequences.The main purpose of an Individual Retirement Account is to provide tax-advantaged retirement savings.However, If you find yourself in a hole and need to use that money, it is available to you -- with a catch.Under section (72(t)(2)(c) of the Internal Revenue Code , an (i.e.the non-employee spouse) can take cash from a Qualified Plan (such as a 401k), without the 10% penalty, even if they are under age 59½.Many spouses caught in the trauma of the divorce settlement process face the same problem.They have a need for cash but most of the savings is in retirement.A qualified domestic relations order – QDRO – is the document that transfers a portion of your 401(k) to your ex in accordance with the terms of your divorce decree.As long as you use one, there are no tax repercussions and the Internal Revenue Service doesn't treat the transaction as a withdrawal.


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