When retirement plans are divided pursuant to a court order, what are the income tax ramifications?
• Tax impact of QDRO on plan participant: If a QDRO orders a distribution of funds from a participant’s plan to a spouse or former spouse, those funds will not represent taxable income to the plan participant. The 10 percent early withdrawal penalty will not apply. However, if the alternate payee is a child or dependent (rather than a spouse), the distribution will be taxed to the plan participant. In such a case, the 10 percent early withdrawal penalty will not apply. • Tax impact on plan participant if there is no QDRO: If there is no QDRO and retirement plan assets are distributed to a spouse (or anyone else), the distribution will be taxed to the plan participant. Furthermore, the 10 percent early withdrawal penalty may apply. Also, beware of withholding requirements. For more information, see IRA and Retirement Plan Distributions. • Tax impact of QDRO on former spouse (or alternate payee): A spouse or former spouse who receives a distribution under a QDRO steps into the shoes of t
