Dividing Qualified Retirement Benefits the Right Way

The Tax Court recently ruled in Rodoni (105 T.C. No. 3) that a rollover of a husband’s distribution from a qualified retirement plan into his wife’s IRA did not qualify as a tax-free rollover. The entire amount of the distribution was taxable to the husband. The wife was assessed a penalty of 6% of the amount paid into her IRA as an excess contribution.

Mario Rodoni participated in his employer’s qualified profit sharing plan. The plan was terminated in February 1988 and he received a distribution of $307,000. He gave the funds to his wife, who within 60 days of the distribution, contributed $219,000 into an IRA in her name. Later that year, the couple was divorced. The divorce judgment, which was entered nunc pro tunc to December 31, 1988, provided that Mrs. Rodoni would receive an interest in the profit sharing plan.

The Tax Court found that the distribution was not completed pursuant to a Qualified Domestic Relations Order (QDRO). The divorce agreement specifying the transfer of the retirement account to the wife was not executed until many months after Mr. Rodoni received the distribution. The agreement was never presented to the administrator or trustee of the profit sharing plan. The Court further concluded that Mr. Rodoni’s interest in the plan terminated with the distribution and a subsequent judgment could not create or recognize rights that no longer existed. Mr. Rodoni paid the IRS a deficiency of $146,544.

The transfer to the wife could have been easily accomplished with no tax to either party. To complete a tax-free transfer, Mr. Rodoni should have contributed the full amount of the distribution to an existing IRA in his name or established and funded a new IRA in his name within 60 days after receiving the distribution. Upon subsequent execution of the marital agreement and the related judgment, Mr. Rodoni could have conveyed his IRA to Mrs. Rodoni or transferred it to her IRA on a tax-free basis under Section 408(d)(6).