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Understanding The Basics of Transferring IRA's and QDRO's

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IRAís At Divorce

 

An IRA Can Be Transferred To A Former Spouse Without Tax Consequences To The Transferor Spouse.Transfer of an IRA to a Spouse - One spouse can transfer his or her IRA to a former spouse as part of a divorce settlement without having to report any income. The spouse who receives the IRA will reportable the entire payment as income --- unless the funds are rolled over into another IRA of the tranferee spouse. Unlike qualified plan benefits, IRAs do not have to be payable pursuant to a QDRO.

 

The Transfer of an IRA To A Non-Spouse Results In Income To The Transferor SpouseTransfer of an IRA to a Non-Spouse - If the IRA is transferred to someone other than a former spouse, such as the children, the spouse making the transfer will be deemed to be assigning income and will be taxed on the distributions.

 

QDROís and Retirement Plan Assets at DivorceIRAs and Retirement Plan Assets

 

Qualified Plan Benefits Should Only be Paid Pursuant to a QDROQualified Plan Benefits Should Only be Paid Pursuant to a QDRO - The use of a Qualified Domestic Relations Order ("QDRO") determines who will be taxed on the distributions from a qualified plan. In a recent case, husband and wife signed a property settlement agreement that provided for a $1 million distribution to Wife from Husbandís qualified pension plan and for Wife to be responsible for any tax obligation with respect to the distribution. The distribution was not made pursuant to a QDRO, and the family court refused to order a retroactive Domestic Relations Order ("DRO"). Because a QDRO had not been issued, the Tax Court ordered Husband to pay the tax on the distribution to Wife. Hawkins v. Commír, 102 T.C. No. 3 (1994).

 

A QDRO Can Be Time-Consuming and Expensive to DraftA QDRO is Time Consuming and Expensive to Draft - Often a great deal of time will elapse before a QDRO can be drafted, agreed upon by counsel and the parties, and approved by the plan administrator and by the court. QDROís are complicated to draft and add expense to the divorce. If other assets are available to offset plan assets, it might be a good idea to try to avoid dividing the plan assets.

 

Put the Plan Administrator on NoticePut the Plan Administrator on Notice - Send the plan administrator a copy of the settlement agreement to immediately put the plan administrator on notice that a DRO will be forthcoming and request a hold on the account or benefits to prevent depletion of the account due to loans or hardship withdrawals. This request will be honored if permitted under the planís QDRO procedures. See Schoonmaker v. Employee Savings Plan of Amoco Corp., 987 F.2d 410 (7th Cir. 1993).

All Plans Are Not the SameAll Plans Are Not the Same - Obtain a copy of the Plan Document and the Summary Plan Description from the Plan Administrator. Carefully review the provisions of the Plan. One of the most common reasons a DRO fails to be a QDRO is because it provides for a type or form of benefit or an option that is otherwise not provided under the Plan. Provisions in a QDRO that work for one plan may not necessarily work for another plan.

 

Do Not Forget to Include the Basic Requirements Necessary for a QDRODo Not Forget to Include the Basic Requirements Necessary for a QDRO - There are a number of basic requirements which must be included in a QDRO. If the order fails to include any of them, it will be rejected. These requirements include:

 

The name and the last known mailing address of the participant and each alternate payee covered by the order.

 

The amount or percentage of the participantís benefits to be paid by the plan to each alternate payee, or how to determine the amount or percentage.

 

The number of payments or the period to which the order applies.

 

The plan or plans to which the order applies.

 

Give the Plan Administrator Precise Instructions as to the Payment of Benefits to the Alternate PayeeGive the Plan Administrator Precise Instructions as to the Payment of Benefits to the Alternate Payee - A QDRO must provide for payments in accordance with the terms of the plan, including timing, amount and method of payment.

 

When Payments May BeginWhen Payments May Begin - An exception to the requirement that a QDRO may not require the Plan to provide any type, form of benefit or any option that is not otherwise provided under the Plan is that a QDRO may require payments to the alternate payee at the participantís "earliest retirement age," even if the participant has not yet retired. The "earliest retirement age" is the date the participant is entitled to a distribution under the Plan or the later of (i) the date the participant attains age 50 or (ii) the earliest date on which the participant could begin receiving benefits under the Plan if the participant separated from service. Thus, an alternate payee may receive plan benefits before a participant.

 

© 1997, Flying Solo. This information is general in nature and is not intended to be construed as legal advice. Because all situations are different, do not make any decisions until you have consulted with the legal professional of your choice.

 

This material was excerpted from "Divorce and Taxes: Practical Tax Planning For The Divorce Lawyer and Client," an information- packed, 84-page publication which covers the tax aspects of everything from Alimony to Property Settlements to Personal Residence Issues to Family Businesses to IRA's and Retirement Plans to Estate Planning to Use of Trusts to Potential Problems with the IRS to such important miscellaneous issues as negotiating for the dependency exemption, premarital agreements, and the deductibility of legal fees. A perfect way to make sure you donít miss important issues. $17.95 including shipping and handling.

 

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