Under section (72(t)(2)(c) of the Internal Revenue Code , an alternative payee can take cash from a defined benefit plan, without the 10% penalty, even if they are under age 59½. Here’s how:
- The retirement plan must be a qualified plan (401k, 403b, etc.) covered by ERISA;
- The funds must be paid to an alternate payee and not to the owner of the account; and
- A Qualified Domestic Relations Order (QDRO) must be created to withdraw the funds
Taxes still must be paid on the money by the alternate payee and is taxable income to them in that year. Also the employer will withhold 20% of the amount to prepay the taxes.
It is also possible to have the spouse take a cash withdrawal and transfer the balance to an IRA. Neither transaction would initiate an early withdrawal penalty by the IRS.