Divorce Settlement
Client (age 54)retired and rolled over lump sum pension with no QDRO attached. One year after retirement the ex-husband sues client for portion of IRA. The attorney’s instrcution order client to present check made out to ex husband. Does client suffer tax consequences? What forms does she need to file with IRS to preclude distribution from penalty?
Permalink Submitted by Alan Spross on Sat, 2009-09-19 02:14
Normal tax and penalty rules apply to distributions in this situation. The QDRO penalty exception only applies to distributions directly from a qualified plan, but not from an IRA account. Therefore, age 59.5 is when the penalty would no longer apply.
With this type of court order or settlement, the income from the distribution is also taxable to the IRA owner. If the settlement involved partitioning the IRA into separate parts, then a share would be transferred to the receiving spouse and their SSN, and then distributions would be taxable to the receiving spouse. These types of settlement are often calculated using tax adjusted figures, ie the cost of taxes is factored into the settlement amount and often the lowest bracket spouse would be the best one to take the actual distribution if distributions will be needed in the near future.
So if I interpreted your post correctly, your client is stuck with both taxes and penalty on this distribution unless she is 59.5 or qualifies for some other exception, eg disability or high medical expenses.