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Retirement > 401(k)s & IRAs
401(k) from a settlement
July 26, 2000: 3:54 p.m. ET

Avoid using the plan to pay off debt; instead roll the proceeds into an IRA
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NEW YORK (CNNfn) - If you get part of your spouse's 401(k) in a divorce settlement, you might think of it as a great source of cash. But there are some potential roadblocks.

In response to a reader's question, Mark Groesbeck, a certified financial planner from Houston, and a member of the Financial Planning Association, suggested rolling the money into an IRA in the name of the divorcee to avoid current taxes.




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Due to divorce I am getting half of my ex's 401(k). I want to use some of the money to pay my student loan and put the rest into savings. What is the best way to do this with the least penalty or tax bite?

When you receive part of a 401(k) as part of a divorce settlement, there is a way to roll the proceeds into an IRA. When a person who gets divorced has a settlement and something called a QDRO (Qualified Domestic Relations Order), the proceeds of the 401(k) can be rolled into an IRA in his or her name.

Thus the assets will continue to be tax-deferred and not currently taxable. If at all possible I would suggest that this be done.

If you need to use some of the assets coming from divorce to pay off debt then I would try to use non-401(k) assets to do this first. Back to top

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.