QDRO Alternate Payee
We have a client relationship that was named as the alternate payee under a QDRO. She was awarded her husband’s $1 million 401K account, fully, upon the dissolution of the divorce. She is 51. He was 60.
I understand that if she opts to roll over the entire balance to an IRA, that the QDRO exception will no longer apply and that any amounts withdrawn will be subject to the 10% penalty on a pre-59.5 basis (other than a 72T payment).
The question:
Once the assets are moved from her husband’s plan account to a plan account in her name, will the normal distribution rules apply as they do within the plan, including the 10% penalty for early distributions? I’m thinking that once SHE owns the plan account that she is no longer the alternate payee.
That said, for the QDRO exception to apply, she would have had to take a distribution PRIOR to the assets being moved to a plan account in her own name. Yes? No?
I feel that she has one stab at taking the penalty-free withdrawals under the QDRO, and that once the assets are moved from her husband’s plan account to a plan account under her name, that she’s treated much like any other participant concerning future distributions. Yes? No?
Any help would be appreciated.
Chris
Permalink Submitted by Alan - IRA critic on Fri, 2013-04-05 03:59
As long as your client maintains this account with this employer, distributions are exempt from the penalty. The plan should provide code 2 on the 1099R, but even if they don’t you client can claim it using Form 5329. See attached:http://www.retirementdictionary.com/definitions/qualifieddomesticrelationsorder
Permalink Submitted by Christopher Lamb on Fri, 2013-04-05 13:10
The link you provide seems to contradict your statement. “However, if the spouse or former spouse alternate payee rolls over the amount to his/her own IRA or OTHER RETIREMENT ACCOUNT, and then takes a distribution from that account, the distribution will be subject to the 10% early distribution penalty…” Leaving the funds in the plan, but transferring them from her husband’s plan account to a plan account in her own name, I believe, would constitute ‘another retirement account.’ If she keeps the money in the plan but moves the funds into a plan account in her own name, I would believe that the 10% penalty would apply should she take distirbutions prior to 59.5. Maintaining this account in the name of her husband is the only way, when QDRO distributions are taken, to apply the QDRO exception to the 10% penalty, from what I’m reading. From what you’ve provided, I don’t believe leaving the plan assets in the plan is good enough… they also need to be left in the same account, rather than transferred to a plan account in the name of the alternate payee. True?
Permalink Submitted by Martin Helmer on Fri, 2013-04-05 16:04
Not true. Alan is correct, as usual.