Fox Rothschild’s New Jersey Family Law Legal Blog welcomes Noah B. Rosenfarb, CPA, an Accountant and Holistic Wealth Advisor with Freedom Divorce Advisors, a financial advising company designed to aid women in securing their financial future post-divorce, as a guest blogger. 

Noah’s articles and insights are particularly relevant with the message and content of our firm’s blog, and, having worked with him on several occasions, we know that he will provide invaluable insights to our readers.  With that being said, I provide below the text of an article Noah recently wrote about using retirement assets to satisfy financial obligations resulting from divorce, and tips to avoid early withdrawal penalties associated with doing so.

Using Retirement Assets for Fees and Housing

Often times, retirement plan assets are needed to satisfy financial obligations that result from divorce – whether they are attorney fees or credits to allow one spouse to stay in the marital home.  There are two common ways to avoid the 10% early withdrawal penalty associated with retirement plans.  They should be leveraged as needed for clients, even though they may require some effort to plan around.

Direct Payment via QDRO

A Qualified Domestic Relations Order (“QDRO”) is typically required to divide certain types of retirement plans, including 401K and 403B plans.  The QDRO, if properly drafted, can provide payments to an “alternate payee” (generally the spouse that does not own the plan) without triggering the 10% early withdrawal penalty.  The amount of the early withdrawal can be discretionary, so you do not need to withdraw 100% of the entitlement.  The balance of the entitlement can be rolled over into an Individual Retirement Account (“IRA”).  The recipient will still be required to pay income taxes on the amount received, but they will not be subject to the penalty.

Note that QDROs do not apply to IRAs.  Therefore, if a “rollover IRA” exists from a former employer sponsored retirement plan, and those assets need to be utilized in divorce, see if there is an existing 401K plan that the spouse could roll this account into.  If so, you could then apply the above QDRO strategy to the new and increased balance.

Substantially Equal Periodic Payments

Another effective means to avoid the early withdrawal penalty is taking Substantially Equal Periodic Payments (or “SEPP”).  These are also referred to as Section 72(t) payments.  Essentially, if one takes a payment stream for the longer of 5 years or until age 59.5, you can avoid the early withdrawal penalty.

There are three methods to calculate the amount of SEPP payments.  What is most important to note is that the SEPP can come from any IRA and do not need to be made from all IRAs.  As a result, if you want $500 or $5,000 per month, it is possible to use the factors (age, interest rates, etc.) to determine how much money an IRA should have to generate the resulting payment that is desired.  

SEPP Example

An example is the best way to illustrate the most common implementation strategy. Husband and Wife have a $400,000 home with no mortgage and a $600,000 IRA account; they have no other assets.  Husband is owed $200,000 for his share of equity in the marital residence and Wife is owed $300,000 of IRA assets. 

The Wife either needs to refinance and increase the balance of the mortgage or provide the husband a credit via the IRA. Generally, increasing the mortgage balance is an uncomfortable change and is utilized only as a last resort.  [If there were sufficient non-retirement assets to satisfy the credit, then that is the most common resolution.]  

In this case, the Wife could provide $300,000 of IRA assets to satisfy the $200,000 owed to the Husband for the house.  The reason the credit is $300,000 is to account for the tax the Husband will pay when he makes withdrawals from his retirement account (at 33% in this illustration).  Negotiating the hypothetical tax can be difficult, as no one knows what the future tax rate might be.  33% may be common, but ranges from 20% to 45% are not unrealistic. 

More importantly, once the Wife relinquishes her interest, it is often difficult or impossible to recreate that level of tax deferred retirement assets.  If she sells the home after her last child graduates for $500,000, she will receive all $500,000 at closing, but she will not have assets sheltered in an IRA. 

In the alternate, if the Wife chooses to increase her mortgage by $200,000 using a 5% interest-only mortgage, her payments would be $833.  To account for this increase in payments, a SEPP would be created for $1,100 a month.  $833 will be used to pay the mortgage and $267 (about 25%) will be set aside to pay income taxes on the withdrawal.  If the $300,000 of retirement plan assets she now can keep increase in value just 4.4% per year, she will still maintain all $300,000 in her retirement plan.

Assuming she sells her home for the same $500,000, she would then have $300,000 as a lump sum and $300,000 in an IRA.  Presumably, this is a better result for the Wife, and reason to utilize this strategy.


There are creative methods that can be implemented to avoid early withdrawal penalties from retirement plans.  All options should be evaluated with respect to retirement plan assets before they are utilized to satisfy financial obligations.