Can I Access Money from My 401K Without the 10% Penalty?

April 5, 2019

In general, you cannot take distributions before age 59-½, as the are subject to a 10% penalty tax if you do. You can avoid the penalty if you become disabled, die, or receive a retirement distribution in divorce from an ex-spouse’s (i.e. 401(k), 403(b)).  

Let’s take a look at what happens when the ex-spouse receives the 401(k) asset. There are some specific rules to be aware of.

Here’s an example.

Sarah was married to an airline pilot who was nearing retirement. They were both age 55. There was $640,000 in his 401(k) and the retirement plan was prepared to transfer $320,000 to her IRA. She could transfer the money to an IRA and pay no taxes on this amount until she withdraws funds from the IRA. But Sarah’s attorney’s fees were $60,000 and she needed to pay those to avoid a lien on her property.

If done correctly, Sarah could take the $60K cash she needed from her soon-to-be exes 401(k) and roll the other into an IRA in her name.  She would owe the ordinary income tax but would save the 10% penalty or $6,000.


After the money from a pension plan goes into an IRA, which is not considered a qualified plan, Sarah 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 that money.

Types of Qualified Plans

It is important to understand the subtle differences when transferring money from qualified plans. One type is a direct rollover where the check is made payable to the company where the IRA is held; not payable to the client. The check may be sent directly to the IRA custodian or the client, however, the check is made payable to the custodian of the funds.

The other type is a 60-day rollover, where the distribution is made payable to the client with 20% withheld for Federal taxes. It is then up to the client to get the funds back into an IRA within 60 days. Additionally, the client must put in the additional 20% withheld for federal taxes for the entire transaction to be a non-taxable event.  

The Unemployment Compensation Amendment Act (UCA), which took effect in January 1993, stated that any monies taken out of a qualified plan or tax-sheltered annuity would be subject to 20% withholding. This rule does not apply to IRAs or SEPs.

In other words, if money is transferred from a qualified plan to an IRA, the check is sent directly from the qualified plan to the IRA. In a rollover, the funds are paid to the person who then remits the money to an IRA. A payment to the person, whether or not there is a rollover, is subject to the 20% withholding. Only a direct transfer avoids the withholding tax.

This is a great planning tool when clients have a need for cash and there is no other way to get it.

It has been said that divorce lawyers have the highest number of malpractice claims. One reason may be that while advising their clients on settlement issues, the lawyer may be giving improper financial advice. This is commonly due to the constant changes in tax law and perhaps the fact that the divorce lawyer’s expertise is in the law, not in taxes.

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