How Are QDRO Distributions Taxed? 



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

Do We Need a QDRO For IRA Funds?


Going through the process of a divorce presents a lot of questions about finances. While the divorce decree is an important document outlining the final determination about critical issues in the divorce, you might also need a qualified domestic relations order to officially explain the handling of retirement funds.

The Process of a QDROqdro

In order for the judge in a divorce case to sign off on a qualified domestic relations order, parties have to provide full disclosure of assets in order to determine what is part of the marital estate. After this has been determined, parties can use court-provided calculators or negotiate the split value of the IRA. Once this amount has been identified, the party receiving funds from the IRA would need to open a QDRO rollover IRA account.

When it comes to dividing the account, this can be represented by a percentage or a dollar amount. When the new account has been created, the QDRO needs to include the names of both parties, the amount being moved, to which account this amount is moving to, and the details of the old account as well. The signed order will need to be presented to both IRA custodians, so it is important that it is prepared properly.

Tips for Preparing a QDRO

It is strongly recommended that you use a professional to review your QDRO. If the document is not worded properly it could be rejected by the plan administrator or it could cause confusion down the line when a division date or amount is not clear. Having someone with experience reviewing your QDRO can make a big difference.

What is the Impact of a QDRO?

Once the court signs off on your QDRO, it becomes part of the total divorce order. The amount detailed in the QDRO for the IRA moves to the new IRA custodian once the QDRO is active. Parties then are responsible for the management of their own IRAs in terms of taking distributions, naming beneficiaries, or making contributions.

Avoid Common IRA Mistakes

Avoid the temptation to expedite the process by taking a liquidation in the same amount as the IRA. This means that a check would be handed over to the other party, but this can be a dangerous mistake because it makes the IRA owner liable for all taxes for distributed amounts. Even if the harm was not intentional, courts tend to look unfavorably on these kinds of rushed actions. Instead, hire someone to review your QDRO in full.

Source: Do We Need a QDRO For IRA Funds? | Robert Hetsler, J.D. CPA,CVA,CFF,FCPA,MAFF,CMAP | LinkedIn