Divorcing (or Legal Separation) Couples May Use a QDRO to Pay Marital Bills
Many couples cannot pay their bills when they divorce or legally separate. Financial hardship is often a primary reason for the split up.
A retirement plan Participant cannot withdraw money from a retirement plan while the Participant is still employed as an employee. (A loan can be taken, however it must be paid back through payroll deductions.)
One way that has worked for many couples is to do a QDRO where there is an agreement that the Alternate Payee will take a distribution and pay off marital bills, such as credit cards, car loans, and medical bills.
Another use for such a QDRO is to get cash to use as a down payment to purchase another home.
The only catch is that the distribution is taxed at the marginal income tax rate of the Alternate Payee. Also, 80% of the distribution is paid to the Alternate Payee. The other 20% is withheld and paid to the IRS as an income tax deposit. That 20% is a tax credit which can be claimed when that year's income tax return is filed after the first of the next year.
And don't forget that Colorado's income tax rate is 4.63%. Colorado tax must be paid as well.
The 10% early withdrawal income tax penalty will not have to be paid as long as the cash distribution is taken from the QDRO account. Don't roll the money into an IRA first.