In our divorce settlement in order for me to keep the house I need to pay my wife her portion of the value. How do I avoid taxes if I withdraw 401k?
You cannot avoid paying income taxes on your withdrawal, which is fully taxable.
If you are under age 59 1/2, you may be exempt from the early withdrawal penalty of 10% if the withdrawal is for a Qualified Domestic Relations Order (QDRO).
Please read this TurboTax Help article for more information.
Sorry, there is no exception and you are subject to the penalty.
Because you did not pay taxes on the contributions, all withdrawals from a 401k are always taxable. And this situation is not an exemption to the 10% penalty for early withdrawal if you are under age 59-1/2.
A QDRO, as mentioned by the other expert, is an order for you to transfer part of the balance of the 401k to your ex. That transfer is tax-free and your ex would pay taxes whenever they made a withdrawal. But that is not what happened here. You didn't transfer part of the 401k to your spouse, you withdrew from the 401k to buy the house. So the withdrawal is taxable per the normal rules.