Divorce
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 A former spouse, to whom the retirement assets are paid, becomes responsible for paying the taxes when withdrawn.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

Related Articles
  1. Retirement

    Divorcing? The Right Way to Split Retirement Plans

    Mishandling how you define and allocate retirement-plan assets in a divorce can cost you plenty in taxes and aggravation. Here's how to do it right.
  2. Retirement

    Retirement Accounts: What happens if a Spouse Dies?

    You don't automatically get your spouse's IRA, 401(k) and other accounts when he or she dies. Here's how to plan so the right survivors get the funds.
  3. Retirement

    Retirement Planning for the Non-Employed Spouse

    A stay-at-home spouse probably racks up more hours working than any office jockey. Make sure he or she is set up to save for retirement, as well.
  4. Retirement

    During a Divorce, Don't Forget Retirement Accounts

    These are the answers to five common questions on how to handle retirement accounts when couples divorce.
  5. Taxes

    The Tax Benefits Of Having A Spouse

    Check out the perks designed to promote and preserve your post-work savings - if you're married, that is.
  6. Taxes

    Unexpected 1099-R Form: What To Do

    Did your IRA custodian report distributions you thought were non-reportable? Find out what went wrong.
  7. Retirement

    Top Retirement Planning Tips for New Mothers

    Whether you choose to be a stay-at-home mom or a work-at-home mom, there are retirement savings options for you.
  8. Personal Finance

    Work or Staying at Home: You Still Need a Plan

    A great deal of the econonmic engine is fueled by stay-at-home parents. Their financial needs matter as much as anyone. Here's how you can help.
  9. Financial Advisor

    7 Top IRA Strategies for Your Clients

    With IRA season in full swing, advisors should consider these seven strategies for clients.
Frequently Asked Questions
  1. What are the Differences Between Affiliate, Associate and Subsidiary Companies?

    All three of these terms refer to the degree of ownership that a parent company holds in another company. Read on to find ...
  2. What Does it Mean if the Correlation Coefficient is Positive, Negative, or Zero?

    Learn what the correlation coefficient between two variables is and what positive, negative and zero correlation coefficients ...
  3. What's the Difference Between a Market Economy and a Command Economy?

    Set by supply and demand, a market economy operates through a price system; in a command economy, governments control the ...
  4. What Factors Cause Shifts in Aggregate Demand?

    Find out how aggregate demand is calculated in macroeconomic models. See what kinds of factors can cause the aggregate demand ...
Trading Center