Advice on avoiding taxes and Medicare increase after receiving $110k from divorce 401(k).

From Yahoo Finance: 2025-04-21 08:00:00

Ran is receiving $110,000 from a 401(k) due to a divorce QDRO and seeks advice on avoiding excess tax and IRMAA implications. Rolling the distribution into an IRA can help prevent tax implications and rising Medicare premiums until withdrawals begin. Seeking a financial advisor’s guidance is recommended for navigating such situations.

When receiving a distribution through a Qualified Domestic Relations Order (QDRO), the tax implications can vary based on how the distribution is taken. Rolling the QDRO distribution into an IRA in your name avoids triggering taxes as it’s considered a tax-deferred account transfer. Taxes are only applicable when withdrawals are made from the IRA.

Taking the QDRO distribution as a lump sum and depositing it into a checking account will result in the full amount being taxed as ordinary income in the year received. This is because the funds are no longer in a tax-deferred account, leading to immediate tax implications.

The Income-Related Monthly Adjustment Amount (IRMAA) affects Medicare premiums based on MAGI thresholds. Rolling the QDRO distribution into an IRA can prevent an increase in MAGI and subsequent IRMAA implications. Considering future withdrawals’ impact on IRMAA territory is crucial for long-term planning.

Adjusting withdrawals based on market performance and portfolio balance can help avoid premature depletion during downturns and allow for increased spending in strong market years. Building an income plan with a financial advisor’s assistance tailored to your assets, goals, and retirement needs can enhance financial planning strategies.

Read more: Where Should I Put the $110k I’m Getting from My Divorce to Avoid Taxes and Medicare Increase?