QDRO distribution over several years
As part of a divorce settlement, can a QDRO be structured for distribution of payments over several years to and avoid the 10% early withdrawl penalty? Each payment over several years would be a cash payment to pay bills in upcoming years or possibly into a 401K and then cashed out. The goal is to avoid taking the entire amount in one year to avoid the higher tax bracket if taken as a lumpsum.
Permalink Submitted by Alan Spross on Mon, 2012-04-02 21:06
It would probably be redundant since the QDRO gives the alternate payee any options available for distribution that would have been available to the employee (ex). But a QDRO cannot force the plan to provide options that would not be available to the employee. Therefore, the wording about periodic distributions is probably unnecessary or would have no effect. It would make sense however to inquire from the plan whether this is allowed before drafting the QDRO. If not, then the settlement might be affected due to the higher taxes for a lump sum. If rolled to an IRA the usual result would be to establish a 72t plan from the IRA to eliminate the penalty. This also provides annual distributions, but at the cost of additional flexibility because of the rigid 72t plan requirements.
Permalink Submitted by Denise Appleby on Fri, 2012-04-27 13:14
Bear in mind too that a QDRO distribution is already exempted from the 10% early distribution penalty. As such, there is no need to structure payments for the purpose of avoiding the penalty. Typically, the QDRO includes information about when the payment should begin and if the payment must be made in a lump-sum or can be made overtime.