QDRO QDRO Tax Implications & Benefits Planning 1 — Questions and Answers
Question 1: When an alternate payee receives a distribution from a qualified plan pursuant to a QDRO, who is responsible for paying the federal income tax on that distribution?
- The alternate payee (Correct answer)
- The participant
- Both parties equally
- The plan administrator
Correct answer: The alternate payee
Under IRC Section 402(e)(1)(A), the alternate payee — not the participant — is taxed on distributions received directly from the plan pursuant to a valid QDRO.
Question 2: An alternate payee who receives a QDRO distribution directly from a qualified plan (without rolling it over) and is under age 59½ is:
- Exempt from the 10% early withdrawal penalty (Correct answer)
- Subject to the 10% early withdrawal penalty
- Taxed at a flat 20% rate
- Required to defer the distribution until age 59½
Correct answer: Exempt from the 10% early withdrawal penalty
IRC Section 72(t)(2)(C) provides a special exception to the 10% early withdrawal penalty for QDRO distributions received by alternate payees, regardless of the alternate payee's age.
Question 3: If an alternate payee receives a QDRO distribution and chooses to roll it over to a traditional IRA, the tax consequence at the time of the rollover is:
- No immediate tax; taxes are deferred until IRA withdrawals are made (Correct answer)
- Immediate taxation on the full rollover amount
- A 20% mandatory withholding that cannot be waived
- A one-time flat tax assessed by the plan administrator
Correct answer: No immediate tax; taxes are deferred until IRA withdrawals are made
Rolling a QDRO distribution into a traditional IRA is a tax-free event; income taxes are deferred until the alternate payee takes distributions from the IRA.
Question 4: When a plan makes a direct distribution to an alternate payee under a QDRO, the mandatory federal income tax withholding rate applied to eligible rollover distributions is:
- 20% (Correct answer)
- 10%
- 15%
- 30%
Correct answer: 20%
Plans are required to withhold 20% federal income tax on eligible rollover distributions paid directly to an alternate payee unless the distribution is sent directly to an IRA or another plan via a direct rollover.
Question 5: For a participant in a qualified plan, the transfer of funds to an alternate payee pursuant to a QDRO is treated for tax purposes as:
- A non-taxable transfer with no income recognized by the participant at the time of transfer (Correct answer)
- Ordinary income to the participant in the year the QDRO is executed
- A capital gain to the participant
- A deductible contribution from the participant's gross income
Correct answer: A non-taxable transfer with no income recognized by the participant at the time of transfer
The participant does not recognize income when the plan transfers funds to the alternate payee under a QDRO; the tax consequence falls entirely on the alternate payee upon distribution.
Question 6: An alternate payee who rolls a QDRO distribution into a Roth IRA (rather than a traditional IRA) will:
- Owe income taxes on the converted amount in the year of the rollover (Correct answer)
- Owe no taxes at any point on the rolled-over funds
- Be subject to a 10% penalty for the conversion
- Receive a tax deduction equal to the rollover amount
Correct answer: Owe income taxes on the converted amount in the year of the rollover
Converting a pre-tax QDRO distribution into a Roth IRA is treated as a Roth conversion, requiring the alternate payee to include the converted amount in gross income for that tax year.
QDRO QDRO Tax Implications & Benefits Planning 1
When an alternate payee receives a distribution from a qualified plan pursuant to a QDRO, who is responsible for paying the federal income tax on that distribution?