How is a Roth 401(k) split during a divorce, and can a spouse's share be liquidated?

Question

I am in the midst of negotiating a divorce where my spouse would prefer, whenever possible, to get cash instead of a retirement account.

I have found many sources online (e.g., this one) stating that a QDRO distribution allows a transfer of funds out of a 401(k) or traditional IRA to a non-holding spouse without the 10% penalty in the event that the spouse is under 59½. The only catch is that, because no tax was ever paid on these assets, the distribution is fully taxable in the year it is received.

I'm having far more trouble finding out what happens with a Roth 401(k).

• Is a QDRO necessary to split a Roth 401(k)?
• Can the spouse receiving the funds liquidate their share of the Roth 401(k) without the 10% penalty?
• Barring that, before the divorce, can contributions to the Roth 401(k) be withdrawn penalty-free (and then divided in the settlement)?
• If the spouse instead rolls over their contribution to a Roth IRA, would they ever be able to do an early withdrawal of those funds?

Answer 1

The QDRO should apply to the whole 401k, so whatever the agreed upon split (for instance 50/50) then you would both receive 50% of the tax-deferred 401k and 50% of the applicable Roth 401k. Since the spouse is not working at the employer - the spouse can then immediately rollover or distribute the money received in the QDRO.

In regards to the taxability of distributions from the Roth 401k QDRO - it would follow regular ordering rules for a Roth IRA. Contributions would be tax and penalty-free always (whether rolled over or remaining in the Roth 401k). Earnings are tax-free if the spouse has had a Roth IRA for more than 5 years and penalty-free if they are over 59 1/2.

The 5-year waiting period to get tax-free earnings restarts if the spouse rolls the money into a Roth IRA and didn't have one before. So if the Roth 401k has been opened for 5 years and the spouse wants the most of the distribution, the spouse should take the distribution directly from the Roth 401k.

I would not liquidate accounts before the divorce decree. Liquidation would be taxable to the owner of the account. So if you are the owner, make the distribution then get divorced all within the same calendar year, you would be liable for all the tax due. It would be very easy to not account for that additional liability while splitting everything evenly. QDRO's exist to avoid this. All liquidation of accounts can be done by the individual owner after the divorce.

Ctrl-F "ordering rules for distributions" option 4 of 7 in IRS Pub link.

Answer 2

While every state is different in terms of divorce laws the typical situation would call for a 50/50 split where your spouse would get 50% of the Roth 401(k) basically put into a different Roth account. You can call your retirement account provider and they can tell you what is required on their end to split the funds. Also, if you are getting a lawyer they should be able to handle this as well.

If your spouse prefers cash they can then take the tax hit to convert it. However, since in the comments you said it was an amicable divorce you can do what I did in that situation and I provided my ex with more cash from our checking/savings and kept more of the retirement money. If you can reach an agreement that way it would be the easiest.

Answer 3

This is normally something you can put on your attorney. But a QDRO works. Bear in mind that many large employers and large plan administrators have a preset form QDRO and it can be easier if you use that form. You can ask them if they have one.

Is a QDRO necessary to split a Roth 401(k)?

Yes, to split your 401(k) with a divorcing spouse, get a QDRO. That includes the portion of your 401(k) account that is in the Roth subaccount.

Can the spouse receiving the funds liquidate their share of the Roth 401(k) without the 10% penalty?

Yes, the alternate payee pursuant to a QDRO is excepted from the 10% penalty distribution.

IRC § 72(t)(2)(C)

Barring that, before the divorce, can contributions to the Roth 401(k) be withdrawn penalty-free (and then divided in the settlement)?

Your 401(k) plan would have to allow this distribution, first. The 10% early distribution penalty only applies to amounts that are taxable. But if you had an in-plan Roth rollover in the last 5 years, you can fall into the 10% penalty because you withdrew the in-plan Roth rollover money too early.

Just use the QDRO. Simpler.

If the spouse instead rolls over their contribution to a Roth IRA, would they ever be able to do an early withdrawal of those funds?

Yes to the extent already taxed. Not the gains on the contributions rolled over.

But again, do the QDRO.

Answer 4

Look at Internal Revenue Code Section 72(m)(10) if trying to split unevenly (the law says you can't).