Tax Implications of Divorce Flashcards
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Read the first 7 Tax Implications of Divorce flashcards as text
What is a Qualified Domestic Relations Order (QDRO)?
Answer: A court order that assigns part of a retirement plan participant's benefit to an alternate payee (typically a former spouse)
A QDRO is a domestic relations court order that recognizes a former spouse's right to receive all or part of a retirement plan participant's benefits.
What happens to the 10% early withdrawal penalty when a divorcing spouse receives a distribution from a 401(k) via a QDRO?
Answer: The 10% penalty does not apply to QDRO distributions from a 401(k) taken by the alternate payee
Distributions made to an alternate payee from a qualified plan pursuant to a QDRO are exempt from the 10% early withdrawal penalty.
A former spouse receives a direct rollover of their QDRO share into their own IRA. What are the immediate tax consequences?
Answer: No taxes are owed immediately; the funds grow tax-deferred in the new IRA
Rolling a QDRO distribution into an IRA defers all taxes; the alternate payee only pays income tax when they take distributions from the IRA.
How are IRAs divided in divorce compared to 401(k) plans?
Answer: IRAs are divided via a transfer incident to divorce, which does not require a QDRO but must be a direct trustee-to-trustee transfer
IRA balances can be transferred to a spouse's IRA incident to divorce without a QDRO; the key is using a direct trustee-to-trustee transfer to avoid taxation.
A spouse receives a lump-sum QDRO distribution from a pension plan and cashes it rather than rolling it over. Which of the following correctly describes the tax outcome?
Answer: The distribution is taxable as ordinary income, subject to mandatory 20% federal withholding
A non-rolled-over QDRO distribution is taxable as ordinary income and subject to mandatory 20% federal income tax withholding, though the 10% penalty is waived.
What is the tax treatment of defined benefit (pension) plan benefits divided by a QDRO when the alternate payee begins receiving monthly payments?
Answer: Payments are taxable as ordinary income to the alternate payee when received
Pension payments received by an alternate payee under a QDRO are taxable as ordinary income in the year received, just as they would be to the original participant.
Which type of retirement account CANNOT be divided using a QDRO?
Answer: A traditional IRA
QDROs apply only to employer-sponsored qualified plans; IRAs are divided under a separate 'transfer incident to divorce' mechanism and do not use QDROs.