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

I’m getting $110,000 from a 401(k) through a divorce QDRO. Where should I put the money to avoid excess tax and IIRMA implications? I’m 70 and my only income comes from Social Security.

– Ran

You have a few options, but be mindful that the tax impact and IRMAA implications of each won’t necessarily be the same. You can avoid taxes by rolling the distribution into an IRA. This also helps prevent your Medicare premiums from rising, at least until you begin withdrawals. This will prevent your Medicare premiums from spiking, as well as taxation—at least until you begin withdrawing money from that IRA.

A financial advisor can help you navigate situations like this one. Connect with a fiduciary advisor who serves your area.

How QDRO Distributions Are Taxed

When you receive a distribution through a Qualified Domestic Relations Order (QDRO), you can choose how to receive it. Taxation of your QDRO distribution can vary based on how you take the distribution.

Because you are the former spouse, you have the option to roll over the QDRO distribution into an IRA in your name. This is no different than if you were rolling your own 401(k) over into an IRA. These rollovers do not trigger taxes because you’re just moving the money from one tax-deferred account to another. You don’t include the rollover amount as part of your income. You are only taxed on withdrawals in the year you take them.

If you choose to take the QDRO distribution as a lump sum and deposit it into your checking account, the full amount will be taxed as ordinary income in the year you receive it. This is because the funds are no longer held in a tax-deferred account.

(And if you need additional help managing distributions from a divorce, consider working with a financial advisor.)

How QDRO Distributions Affect Medicare Premiums

The Income-Related Monthly Adjustment Amount (IRMAA) increases your premiums for Medicare Parts B & D. It applies when your modified adjusted gross income (MAGI) surpasses certain thresholds. It’s good that you are thinking about this, but I don’t think it’s something that is going to affect you. Here’s why:

Rollovers Don’t Affect MAGI

For starters, if you roll the QDRO distribution into an IRA, your MAGI will not increase. That’s because the rollover isn’t included in your income.

It does mean that you’ll have to consider whether future withdrawals could push you into IRMAA territory. If you’re living on Social Security and avoid large IRA withdrawals, IRMAA is unlikely to be an issue. This assumes you do not have another large retirement account balance that you haven’t started withdrawing from yet.

(Some financial advisors can offer tax-planning advice. Speak with an advisor today to see if they can meet your specific needs.)

IRMAA Exemption

If you take the distribution as a lump sum, however, you could initially trigger IRMAA. The first IRMAA level starts for Medicare beneficiaries who file individual tax returns when their MAGI hits $106,000 in 2025. A second IRMAA threshold begins when an individual’s MAGI reaches $133,000.

Also keep in mind that IRMAA operates on a two-year delay. Assuming this QDRO applies to 2025, that means it would potentially affect your Medicare premiums in 2027.

Regardless, there are certain exceptions to IRMAA when you experience a qualifying life event. Divorce qualifies as one. If you get an IRMAA increase notice, you can submit Form SSA-44 to challenge it. The form tells Social Security about your life event and asks them to use a more recent tax year to recalculate IRMAA.

(A financial advisor who specializes in retirement planning can help you build an income plan that potentially avoids or minimizes IRMAA.)

Bottom Line

As long as you roll the distribution into an IRA, you won’t have an immediate tax liability from the money. You also won’t see an increase in your Medicare premiums, assuming you don’t withdraw all of the money immediately. But even if you take the lump sum and have a big tax hit, you still may not be subject to IRMAA if you submit form SSA-44.

Tips for Retirement Income Planning

Instead of a fixed percentage each year, adjust withdrawals based on market performance and portfolio balance. Approaches like the “guardrails strategy” or flexible spending floors can help avoid premature depletion during downturns while allowing more spending in strong market years. This makes retirement income planning more responsive and resilient over time.
A financial advisor can help you build an income plan based on your assets, goals and financial needs in retirements. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Please note that Brandon is not an employee of SmartAsset and is not a participant in SmartAsset AMP. He has been compensated for this article. Some reader-submitted questions are edited for clarity or brevity.