Pension Distributions Under a Qualified Domestic Relations Order (QDRO)

A Qualified Domestic Relations Order (QDRO) is a judgment, decree, or order relating to payment of child support, alimony, or marital property rights to a spouse, former spouse, child or other dependent.

DISTRIBUTIONS: When it involves the allocation of the benefits of a qualified pension plan, the order has to contain certain specific information like the amount of the participant's benefits to be paid to each alternate payee.

  • Child or dependent - If a child or dependent receives a distribution under a QDRO, the amount is taxed to the plan participant.
     
  • Spouse or former spouse - If a spouse or former spouse receives retirement benefits from a participant's plan under a QDRO, the former must report the payments just as though he/she were the plan participant. The taxability is computed by allocating the spouse/former spouse a share of the investment in the contract and figuring the taxable portion accordingly.

ROLLOVERS: An alternate payee spouse under a "qualified domestic relations order" can qualify to rollover retirement plan distributions. The maximum amount, which may be transferred to another plan in a rollover, can't exceed the fair market value of all the cash or property received LESS any after-tax employee contributions, which are part of the distribution. Generally, a rollover must be completed within 60 days after a distribution is received in order to ensure non-taxability.

The advantages of rollovers are that:

  • They postpone the payment of tax until the funds are withdrawn from the new plan;
  • They provide a taxpayer with the opportunity of being in a lower tax bracket when the funds are withdrawn from the rollover account;
  • Funds can continue to accumulate in the new plan on a tax-free basis.

The disadvantages of rollovers are that:

  • Amounts can't generally be withdrawn prior to age 59 1/2 without penalty;
  • If the rollover was into an IRA, withdrawals are ordinary income and don't get the benefit of the 10-year averaging if the taxpayer qualifies.

EARLY WITHDRAWAL PENALTY: Generally, distributions from qualified retirement plans before the age of 59 ˝ are subject to the early withdrawal penalty. However, distributions from a qualified retirement plan to an alternate payee under a qualified domestic relations order is exempt from that penalty. This exception does not apply to IRA accounts.

CAUTION: If the recipient rolls the distribution into his or her own IRA account, then any subsequent distribution will be subject to the early withdrawal penalty.