IRA accounts are divisible in a Colorado divorce or legal separation.
A QDRO is not used because an IRA is not a retirement plan. Instead, an IRA is just a savings account with tax-deferred earnings and some minimum distribution rules.
If the distributee is younger than age 59.5, a 10% early withdrawal penalty will be incurred in addition to the payment of ordinary income tax at the Alternate Payee’s marginal tax rate.
Therefore, most Alternate Payees should not roll retirement plan money (such as a 401(k)) over into an IRA because cash distributions from a qualified retirement plan do not incur the 10% early withdrawal penalty even if younger than age 59.5. But if the rollover to an IRA is done before the cash withdrawal, then the 10% early withdrawal penalty must be paid. A big mistake.
When a cash withdrawal is made, 80% will be distributed. 20% will be deposited with the IRS as a tax prepayment. That 20% still belongs to the Alternate Payee. Credit for that 20% will be made on the income tax return for that tax year.
Financial planners do not earn commissions on 401(k) money. They earn commissions on IRA money. That is the reason they want you to roll 401(k) money over into an IRA – so they can earn commissions..