ira from qdro taking distribution prior to 59 1/2
Wife receives ira via QDRO from a divorce, she wants to take a distribution 1 time but she is not 59 1/2. Is the 10% penalty going to apply?
Wife receives ira via QDRO from a divorce, she wants to take a distribution 1 time but she is not 59 1/2. Is the 10% penalty going to apply?
Permalink Submitted by Jose Morales on Fri, 2011-01-28 17:15
The funds are treated as if they were the spouse’s own IRA funds from the beginning, and subject to all the same IRS regulations as any other IRA.
Permalink Submitted by Lee Martinson on Fri, 2011-01-28 18:48
According to Pub 590, 2009 page 27 :
Distributions under divorce or similar proceedings (alternate payees). If you are the spouse or former spouse of an employee and you receive a distribution from a qualified retirement plan as a result of divorce or similar proceedings, you may be able to roll over all or part of it into a traditional IRA. To qualify, the distribution must be:
One that would have been an eligible rollover distribution (defined earlier) if it had been made to the employee, and
Made under a qualified domestic relations order.
Qualified domestic relations order. A domestic relations order is a judgment, decree, or order (including approval of a property settlement agreement) that is issued under the domestic relations law of a state. A “qualified domestic relations order” gives to an alternate payee (a spouse, former spouse, child, or dependent of a participant in a retirement plan) the right to receive all or part of the benefits that would be payable to a participant under the plan. The order requires certain specific information, and it cannot alter the amount or form of the benefits of the plan.
Tax treatment if all of an eligible distribution is not rolled over. Any part of an eligible rollover distribution that you keep is taxable in the year you receive it. If you do not roll over any of it, special rules for lump-sum distributions may apply. See Publication 575. [b]The 10% additional tax on early distributions[/b], discussed later under What Acts Result in Penalties or Additional Taxes , [b]does not apply[/b].
So it looks to me like if done right, there would be no penalty.
Permalink Submitted by Lee Martinson on Fri, 2011-01-28 21:17
Of course if it’s already rolled into the IRA–oops, looks like it would be too late and would incur the penalty.
Permalink Submitted by Alan Spross on Fri, 2011-01-28 23:48
Correct.
A distribution directly from an employer plan per QDRO is not subject to the penalty. Or it can be rolled over to an IRA.
But once in the IRA is is subject to IRA rules and a distribution directly from the IRA does NOT get the QDRO exception. Of course, a SEPP plan could be started to avoid the penalty on the IRA distributions, but you indicated this was a one time distribution and therefore a SEPP would not be advisable.
If receiving spouse wanted a one time distribution, it should have been taken out of the employer plan penalty free and the remaining balance in the plan sent to an IRA in a direct rollover.