How Are QDRO Distributions Taxed? 

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qdro-tax

It is said that the only sure things in life are death and taxes.

There is no doubt that the Internal Revenue Service wants their share of any income received by US taxpayers, and distributions from Qualified Domestic Relations Orders (QDROs) are no exception. Whether paid by the plan participant or an alternate payee, taxes are an inescapable part of the process.

Most people recognize that a plan participant must pay taxes on any distribution of QDRO benefits. However, what are the tax liabilities facing an alternate payee?

When the alternate payee is a spouse or former spouse who receives a share of the QDRO benefits from a retirement pan, he or she is also required to report the money received as if they were the actual plan participant. However, the spouse or former spouse is also entitled to a share of the participant’s cost basis (their investment in the contract). According to the IRS, the alternate payee’s share is equal to the participant’s cost basis multiplied by a fraction. This fraction is calculated as follows:

Present Value of the Benefits Payable to the Alternate Payee ÷ Present Value of All Benefits Payable to the Plan Participant = fraction

If the alternate payee is a child or other dependent of the plan participant, the taxes on benefits is assessed to the plan participant.

In some cases, an individual can roll over, tax-free, all or part of a QDRO distribution. If the alternate payee is either the spouse or former spouse of the plan participant, then he or she can roll over the distribution into another qualified retirement account (such as an IRA) and avoid any immediate tax liability on the QDRO distribution. Pursuant to the IRS, this option is not available to non-spousal alternate payees (e.g. children or other dependents).

Source: How Are QDRO Distributions Taxed? – Retirement Division, Forensic Accounting and Business Valuation Blog