If your ex-spouse gives you funds from their 401K due to a divorce settlement, and need those funds before you reach age 59.5, then you likely can withdraw these funds directly from the ex-spouse’s 401K without having to pay a 10% penalty. If you roll these funds from the 401K to your Traditional IRA, then any withdrawals from the Traditional IRA will be subject to the 10% tax. If you think you will need these funds before age 59.5, instead of rolling the funds from the 401K to your Traditional IRA, you should consider leaving the funds in a segregated account with the 401K plan trustee. Distributions from the segregated 401K account pursuant to the divorce decree “QDRO” are not subject to the 10% tax even if made before age 59.5.
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