In cases of divorce, there are provisions that allow for the distributions of assets to a former spouse, child or other dependent without incurring early withdrawal penalties. A former spouse, to whom the retirement assets are paid, becomes responsible for paying the taxes when withdrawn.
Qualified Domestic Relations Order (QDRO)
- A QDRO is a judgment, decree or order relating to the payment of child support, alimony or marital property rights to a spouse, former spouse, child or other dependent. It applies to qualified and 403(b) plans, but not IRAs.
- Generally, under a qualified plan, plan assets may not be assigned, alienated or subject to any type of attachment, garnishment, levy or other legal or equitable process. This means that, besides a few narrowly defined exceptions, creditors have no right to qualified-plan assets. One of these exceptions is the QDRO. The plan administrator is required to review a QDRO to determine if it meets regulatory and plan requirements.
- A QDRO may not award an amount or form of benefit that is not available under the plan.
- A spouse or former spouse who receives part of the benefits from a retirement plan under a QDRO, reports the payments received as if they were a plan participant.
- A distribution that is paid to a child or other dependent under a QDRO is taxed to the plan participant.
Transfer Incident to Divorce
This applies to the division of IRA assets in a divorce. If the transfer to a former spouse by a divorce or separate maintenance decree or a written document related to such a decree, the interest in the IRA, starting from the date of the transfer, is treated as the former spouse's IRA. The transfer is tax free.
Transfer methods: There are two commonly-used methods of transferring IRA assets to a spouse or former spouse.
- Changing the Name on the IRA - If all the assets are to be transferred, you can make the transfer by changing the name on the IRA from your name to the name of your spouse or former spouse.
- Direct Transfer - Under this method, you direct the trustee of the traditional IRA to transfer the affected assets directly to the trustee of a new or existing traditional IRA set up in the name of your spouse or former spouse.
Taxation of Distributions
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