Q: My wife and I are divorcing, and I'm giving her my 401k in the settlement. Does she get taxed on this?
A: For the transfer of your 401K to her, make sure that you use a Qualified Domestic Relations Order (QDRO). This will ensure that the transfer of the 401K from you to her is not treated as a taxable distribution to you. If done in the proper manner, the 401K will be transferred into her name and she will become the owner of the account. Any distributions she takes at that point will be treated just like any 401K distribution. So, she will be taxed on any distributions in the year she takes them and if she does not meet the requirements for a qualified distribution, she will be subject to the 10% penalty for early withdrawals. I recommend that you have a qualified divorce attorney help you in the divorce to make sure that the QDRO is written correctly, as well as to deal with all the other often complex issues in transferring property in a divorce.
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