Court Approved Disburement
A client is going through a nasty divorce where the spouse demands cash settlement. Her IRA is the only place she can get the money. He does NOT want her IRA– just after tax cash.
Will a court approved QDRO alleviate the 10% penalty if she cashes out her IRA and not hand over an IRA? I assume nothing alleviates the taxes due on the income.
Permalink Submitted by Alan Spross on Tue, 2009-05-19 21:11
A QDRO is not necessary to transfer an IRA, only a court order for a transfer incident to divorce. However, whether the other spouse is awarded a portion of the IRA or the settlement dictates an after tax amount of cash, the distribution will be subject to and early withdrawal penalty unless IRA owner is 59.5 or qualifies for another exception to the penalty.
For example, if the IRA owner is in their 50’s, and the settlement agreed on payout over a period of 5-10 years, the 72t plan could be started designed to produce the appropriate payout over the time period alloted. Distributions would then not be subject to the early withdrawal penalty and in addition, would be taken equally over the period and this would avoid a single large distribution that would likely inflate the marginal tax rate.
If the divorce is bitter, then each party should be represented by experienced divorce counsel that understands the tax issues for IRAs and other deferred retirement plans. Unnecessary taxes and penalties hurts both parties.