72(t) before and after a QDRO

Submitted by Mike Tomich on Wed, 2016-10-05 20:40

my client has a 72(t) withdrawing 3300.00 per year, for the past 8 years. She got divorced and the 72(t) was divided
50% to her ex spouse.
What happens to the withdrawal? Does it remain at $3300.00 or does it reduce to 50% of the $3300.00, due to the account value being 50% less?
It has been, very, difficult to get a definitive answer.



Submitted by Alan - IRA critic on Wed, 2016-10-05 23:53

  • The reason for that is the IRS has been all over the place with PLRs over the last two decades. But the trend appears to be more receptive to accepting a logical change in the distribution to the taxpayer. For example, if the taxpayer reduces the distribution by 50% effective in either the year the divorce becomes final or the following year, the IRS will probably not bust the plan. It is less clear whether the receiving spouse can continue the plan for their 50% or would have to start their own plan.
  • It is preferable for the settlement to be written leaving the 72t account out, of if that is not possible, for the taxpayer to continue the dollar distributions in the original amount. These options will reduce the risk for IRS problems.
  • Note that a QDRO applies to employer plans, while an IRA account is split according to a “transfer incident to divorce.”  These observations apply either way, but a 72t from an employer plan is always more risky due to less control over what the employer plan might do.


Submitted by Mike Tomich on Thu, 2016-10-06 21:22

THIS PLAN IS AN IRA.  DO I UNDERSTAND YOU CORRECTLY, WE MAY KEEP THE $3300.00 DRISTRIBUTION,WITH THE LESSER PRINCIPAL AMOUNT?



Submitted by Alan - IRA critic on Thu, 2016-10-06 21:45

Yes, that should not present a problem. The ex spouse’s share of the IRA would not come with a 72t, and they would have to start a new 72t plan if they wanted to. The transfer of the ex spouse’s share out of client’s IRA would not be reported on a 1099R as these can only be done by a non reportable direct transfer. The IRS would likely not even notice the transfer, but even if they did, they would not bust the client’s 72t plan and allow it to continue with the same 3300 distribution. This is the safest action the client can take in view of the IRS’ inconsistent past with respect to their letter rulings over the last 20 years. Considering the low amount of these distributions and the high cost of the client getting their own PLR, there is no reason to even consider requesting a PLR for the client.



Submitted by Mike Tomich on Fri, 2016-10-07 20:21

Thank you!!!!  This is so very helpful. Sincerely, Mike Tomich



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