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A QDRO or qualified domestic relations order is used to divide a pension or 401k.

First you (or she since she's getting the money) would need an experienced attorney to draft a QDRO. They are highly technical documents and shouldnt be attempted without legal help.

Second, how the loan balance is treated will be determined by the terms of the qdro. It will either say her share is subject to the loan balance or not. For instance if you gave her 50% subject to your loan balance then her 50% share would actually be $43,500.00. If not subject to the balance her share would be $57,500.00. An attorney representing her would obviously not want to include the loan balance in her share.

As for being
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Sorry got cut off... As for being penalty free, a qdro can have no tax consequences for the receiving spouse but there is certain specific language that must be included in the qdro. She must roll the proceeds directly over into an IRA within 60 days of the date of distribution to avoid tax consequences. Unless "magic language" is used though there is going to be a 20% income tax withholding off the top of the transfer for your spouse. If she doesn't roll over and takes the cash as an early distribution then the 20% withholding will apply in addition to possibly more taxes depending on her tax bracket.

Bottom line is you and your spouse need to consult attorneys regarding the transfer of retirement assets. There's a lot more I didnt cover - it's a complicated topic.
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