Any distribution to an alternate payee pursuant to a qualified domestic relations order (within the meaning of section 414(p)(1)).
Note the phrase "any distribution."
I received a portion of my ex-spouse's retirement account as part of the divorce settlement. I took the distribution as cash for living expenses, rather than rolling the amount into another RA. Can I still qualify for Alternate Payee Under QDRO, eliminating the 10% early withdrawal penalty.even though the 1099-R form provided by the plan indicates a 1?
If you are an alternate payee under a QDRO with the Form 1099-R issued by your ex-spouse's retirement plan to you, yes, you can claim the penalty exception for a payment made to an alternate payee under a QDRO. Go to Other Tax Situations -> Extra tax and early retirement withdrawals and make the entry in the box for Alternate Payee Under QDRO.
It's odd that a distribution to an alternate payee under a QDRO would have code 1 instead of code 2.
Is the IRA/SEP/SIMPLE box marked on the Form 1099-R provided by the payer?
If you are an alternate payee under a QDRO with the Form 1099-R issued by your ex-spouse's retirement plan to you, yes, you can claim the penalty exception for a payment made to an alternate payee under a QDRO. Go to Other Tax Situations -> Extra tax and early retirement withdrawals and make the entry in the box for Alternate Payee Under QDRO.
So would you include the 10% penalty amount in that Alternate Payee under QDRO box?
Yes, if I received the distribution as an alternate payee under a QDRO.
Unfortunately, you cannot avoid the 10% early withdrawal penalty if you are not aged over 59 1/2 and the distributions from the retirement plan were for living expenses.
The IRS says:
A spouse or former spouse who receives QDRO benefits from a retirement plan reports the payments received as if he or she were a plan participant.
Please read this IRS document:I don't believe this answer is correct. You can avoid the 10% penalty if you receive the distribution as a result of a QDRO.
According to this article, you can only do it a single time, but I have not found where that is stated explicitly.
https://www.cornerstoneplanning.com/newsletter/item/withdrawing-money-from-a-qualified-plan-without-the-10-penalty-part-2
mmclean, presumably you are referring to the incorrect answer that indicates that the early-distribution penalty cannot be avoided.
Under the QDRO, there is no statutory limitation against the alternate payee receiving multiple nonperiodic distributions from the plan. Whether or not the alternate payee is limited to taking a lump-sum distribution from the alternate payee's separate account depends on the terms of the plan. If the plan permits multiple nonperiodic distributions, there's no reason that the alternate payee couldn't apply the alternate-payee exception to multiple separate distributions from the plan. However, if any portion is rolled over to another qualified retirement account, that portion is no longer eligible for the alternate-payee exception.
@dmertz - yes i was referring to the answer indicating that the early-distribution cannot be avoided. That is incorrect. It CAN be avoided.
You provide an interesting take on the multiple distribution point, though. I had a conversation with Fidelity; they will segregate a 401K once it is approved as a QDRO (they have an online form to file it). The alternate payee will then have their own, separate account. In general, Fidelity allows for multiple, non-periodic distributions. They said it was up to my company's benefits admin on how long they allow the funds in that account to exist (I have a call into my company's benefits coordinator to find that out - I will also tell them my plan, just to make sure they don't enforce any other limitations). My bigger question is inre: IRS. Will they allow me to take these multiple distributions without charging me the 10% fee for the subsequent distributions (in years 2, 3, 4, and so on...)
According to IRS Publication 558, early distributions are taxable at 10% unless certain exceptions apply. The exceptions don't seem to apply to your situation, and whether the IRS will allow you to make multiple distributions is not mentioned in their language. Therefore it would be considered a be a legal issue and it would be best to consult with a tax attorney or other specialist, since legal issues are out of Scope.
re: IRS. Will they allow me to take these multiple distributions without charging me the 10% fee for the subsequent distributions (in years 2, 3, 4, and so on...)
As an exemption to the 10% early distribution penalty, section 72(t)(2)(C) simply says:
(C)Payments to alternate payees pursuant to qualified domestic relations orders
Any distribution to an alternate payee pursuant to a qualified domestic relations order (within the meaning of section 414(p)(1)).
Note the phrase "any distribution."
@ReneeM7122 - the exception does apply in the case of a QDRO. As long as it is allowed under the terms of the plan (which I confirmed it does for a Fidelity 401k), then the 10% penalty will NOT be assessed. I don't think that point is up for debate.
What is up for debate is whether the newly assigned 401k QDRO account can be drawn from with multiple distributions subsequent to this initial, 10% penalty-free distribution.
@mmclean wrote:
@ReneeM7122 - the exception does apply in the case of a QDRO. As long as it is allowed under the terms of the plan (which I confirmed it does for a Fidelity 401k), then the 10% penalty will NOT be assessed. I don't think that point is up for debate.
What is up for debate is whether the newly assigned 401k QDRO account can be drawn from with multiple distributions subsequent to this initial, 10% penalty-free distribution.
See IRS article:
"A QDRO may not award an amount or form of benefit that is not available under the plan."
Contact then plan administrator to see if that is allowed under the terms of the plan.
macuser_22, that simply determines what benefits are permissible under a QDRO. It has nothing to do with the fact that any distribution made to an alternate payee under a QDRO (which can only be a benefit that is permissible under a QDRO, otherwise it's not a QDRO), is exempt from any early-distribution penalty.
Where it states, "Once Stephanie has taken her withdrawal, which is allowed only once, she rolls her 401(k) to an IRA," the reference cited by mmclean is either simply wrong or it's failing to convey that this particular QDRO agreement only permits the distribution to the alternate payee to be a lump-sum distribution and not a partial distribution. If the plan only permits a lump-sum distribution but Stephanie wants to continue to defer everything other than what is immediately needed, Stephanie can roll over to an IRA whatever isn't needed. After a lump sum distribution, nothing will remain in the 401(k) to be paid to Stephanie as an alternate payee under the QDRO.
(That reference also demonstrates ineptness in drafting the separation agreement by making the assumption that $750,000 of equity in a home is equivalent to $750,000 in a 401(k), but I guess that's not the focus of the reference. Still, it goes to show that the example in the reference was rather poorly thought out.)
@dmertz - i had the same initial impression about the example being flawed because it simply ignored tax ramifications, risk, and other limitations of each source of the $750K. But all that aside, I have been fishing around forever for any cases that have dealt with multiple distributions. I would hate to predicate an agreement based on a non-penalty assumption and then find out the waiver is disallowed by the IRS.
I have recorded conference calls w three Fidelity benefits consultants familiar with the plan; all of them have stated that a QDRO account in the plan allows for on-demand, non-uniform withdrawals to be made through their online request portal and they are transferred in a matter of days (subject to 20% mandatory withholding).
Given the plan allows it, my only hesitation surrounds how the IRS will view it. Have you seen any cases upholding the non-penalty view?
This is a bit like trying to prove a negative. You wouldn't expect to find tax cases discussing something that the IRS doesn't challenge. As I pointed out previously, the tax code which the IRS must follow exempts "any payment" made to an alternate payee under a QDRO. I don't see how a plain reading of that could be interpreted as saying "only the first payment."
The closest thing that I can find where the IRS mentions anything related to this is in PLR 9013007 where it essentially quotes section 72(t)(2)(C) by referring to "any distribution to an alternate payee pursuant to a qualified domestic relations order." (It actually refers to section 72(t)(2)(D) as the section was numbered in 1990.).
IRS Pub 560 includes the sentence, "Payments to an alternate payee under a QDRO before the participant attains age 59½ aren't subject to the 10% additional tax that would otherwise apply under certain circumstances." Note the use of the plural "payments" and the lack of any mention of the first payment.
You would have to go to a lawyer if you want in actual legal opinion from someone who could be held accountable for their opinion. Nothing in this forum constitutes a legal opinion. Contact your lawyer who would have been involved in drafting or reviewing the QDRO.
You could also contact the plan to see what code that they will use for distributions made to an alternate payee under a QDRO. For reporting any payment to an alternate payee under a QDRO they should use code 2 which indicates that the distribution is exempt from penalty.
Maybe I can help, CDFA by trade. It is not stated explicitly. That is what causes a lot of confusion. IRS is silent on the topic. However, I can tell you how things typically work.
When you take a QDRO distribution, most plan providers will require that you distribute (rollover) the remaining balance to another plan (IRA). They want the plan cleaned out of their system. Thus you are typically limited to one QDRO distribution.
I suppose if you found a plan provider that allowed you to keep the money in the plan, you theoretically could do multiple distributions that would be exempt from the 10% penalty. But I have not seen a plan that is willing to do this. Know that I have also discussed this extensively with a local QDRO attorney that does extensive work with preparing QDROs for Fortune 500 companies that use Fidelity. And I will add, that just because you might be able to do something, it doesn't mean that you should. That same QDRO attorney recommends that if you plan on taking a QDRO distribution that you do it within the first year of the QDRO being funded, even though there is no real guidance on the subject. But as stated above, when it doubt, talk to the attorney.
Kyle Eaton, CDFA
www.counterbalancedivorce.com