Distribution via QRRO from Roth 401(k)

[fmsinc]

The court awarded my client a percentage share of her ex-husband's 401(k) account.  It turns out that abut 90% of his 401(k) are in a Roth funds.  

She plans to take a taxable distribution since she needs the money now.  If the distribution was coming from a traditional pre-tax 401(k) it would be income taxable to her and the Plan would withhold 20% for Federal taxes, and there would be no 10% premature withdrawal penalty under IRC 72(t)(2)(C).  

Since it's a Roth account, will she have to pay income taxes on a direct distribution, or will it be tax free? 

72(t)(C) provides that an exception to the imposition of the 10% penalty under 72(t)(1) includes:

"(C)Payments to alternate payees pursuant to qualified domestic relations orders: Any distribution to an alternate payee pursuant to a qualified domestic relations order (within the meaning of section 414(p)(1))."

So one would surmise that the 10% penalty will not apply to the Roth distribution.  

I guess she could take a loan or make a hardship withdrawals if she is disabled, or she can just wait until age 59-1/2. 

What do you think?  Any creative ideas? 

David

[Bird]

Without looking anything and without cites, I'd think that the taxation of Roth (gains only of course) would depend on his age and the holding period. I don't recall an exception for a QDRO. Assuming he is under 59 1/2, then the gains would be taxable (and subject to 20% WH) but not subject to the 10% penalty.