401K question for Lee

[marlin]

Lee - on your website under a section titled "Cash in Divorce", you make a note about distributing cash from a retirement plan..."One note about distributing cash in a retirement plan. If a participant in a 401(k) plan distributes cash to his or her spouse in divorce by means of a QDRO, neither the participant spouse nor the recipient spouse will be liable for the 10% penalty. The recipient spouse will be liable for income tax at his or her tax rates, but if his or her income is very low, income tax may not be much of an issue". 

Just so I'm clear, even if my spouse elects to use the cash today rather than roll it into an IRA, she still won't have to pay the 10% penalty?  This might really help us resolve our differences in reaching a settlement.

[livealittle]

I'm not Lee, but here's what the IRS says about it.

Qualified domestic relations order (QDRO).   You may be able to roll over tax free all or part of a distribution you receive from the CSRS, the FERS, or the TSP under a court order in a divorce or similar proceeding. You must receive the distribution as the government employee's spouse or former spouse (not as a nonspousal beneficiary). The rollover rules apply to you as if you were the employee. You can roll over the distribution if it is an eligible rollover distribution (described earlier) and it is made under a QDRO or, for the TSP, a qualifying order.

  A QDRO is a judgment, decree, or order relating to payment of child support, alimony, or marital property rights. The payments must be made to a spouse, former spouse, child, or other dependent of a participant in the plan. For the TSP, a QDRO can be a qualifying order, but a domestic relations order can be a qualifying order even if it is not a QDRO. For example, a qualifying order can include an order that requires a TSP payment of attorney's fees to the attorney for the spouse, former spouse, or child of the participant.

  The order must contain certain information, including the amount or percentage of the participant's benefits to be paid to each payee. It cannot require the plan to pay benefits in a form not offered by the plan, nor can it require the plan to pay increased benefits.

  A distribution that is paid to a child, dependent, or, if applicable, an attorney for fees, under a QDRO or a qualifying order is taxed to the plan participant.


and that can be found here:
http://www.irs.gov/publications/p721/ar02.html#d0e2306

[marlin]

Thanks for the reply...although I'm not sure that answers my question.

[marlin]

livealittle...i checked the link, and it looks like they're talking about people in civil service.

[Chris]

Marlin,

Doesn't matter.  As long as the QDRO is filed properly, there is no 10% penalty, whether she takes cash, or rolls it over.  If she takes cash, she (or both of you) would be liable for the normal tax liability, but not the penalty.  If she rolls it over into another qualified retirement plan (such as an IRA), she can defer the tax until retirment. 

[marlin]

Chris - thanks for the reply.  For clarification, what determines whether the QDRO is "filed properly"?  Is there specific language needed in the QDRO to address a cash distribution?

[Chris]

Hey Marlin,

I'm not an attorney, so I can;'t give you specifics on how to prepare a QDRO.  However, you don't need to spend $1,000 on an attorney to prepare one.  I had a paralegal prepare ours, and it cost $350.

You might try a google search also, if you really want to prepare it yourself. 

[Chris]

By the way, I've been preparing tax returns for several years, so I know my way around the tax law, FYI.

[marlin]

Thanks for the advice.