What to do with retirement pay from a former spouse? I’m getting super taxed as a distribution.

[DaveF1006]

Retirement distributions are taxable regardless on whether they are yours or part of a divorce settlement from a former spouse. 

[brew717559]

Yes but I’ve always treated them as payments rather than distributions. Am I handling this all wrong?  Are these payments supposed to be maintained differently?  I was never advised so always just assumed it was income but it appears it is considered an early distribution and I’m being penalized. 

[Opus 17]

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@brew717559 wrote:

Yes but I’ve always treated them as payments rather than distributions. Am I handling this all wrong?  Are these payments supposed to be maintained differently?  I was never advised so always just assumed it was income but it appears it is considered an early distribution and I’m being penalized. 

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Did you get a 1099-R?

In general, if your divorce requires your spouse to split their qualified retirement account with you (IRA, 401k, etc.), then each ex-spouse will get a 1099-R for their portion of the payout and each spouse will be responsible for the taxes on their share.  

I'm not clear on the rules for the penalty for early withdrawal if your spouse is over retirement age but you are under age 59-1/2.  Can you tell us if this is a pension, an IRA, a 401k, or what kind of plan it is?  If you got a 1099-R, what codes are in box 7?

@dmertz 

[DaveF1006]

Yes.  I do see where this is an issue. Unfortunately, there is no contingency clause that I am aware of that would prevent the early withdrawal penalty because you are now the owner of this retirement account so the same rules apply whether you were the original recipient or not. This is still a taxable distribution and the early withdrawal penalties apply.

Let me make a suggestion!!  Establish an IRA account of your own. Any future distributions can be directly rolled over into your IRA ( as long as you do this within 60 days after you receive the distribution) and this will be a tax-free distribution and you will avoid any early withdrawal penalties. Why not save for your own retirement?

@brew717559 

[Opus 17]

Also be aware there is a difference between alimony/spousal maintenance, and a retirement distribution.  Alimony would be "John must pay Betty $1000 per month as spousal support for 10 year or until she remarries" or something like that.  Where it doesn't matter where John gets the money. 

A retirement distribution would be something like, "Because Betty supported John during his working life, Betty is entitled to 40% of John's pension or IRA, whenever he retires."  (Usually due to ERISA or some other law.)

[brew717559]

Thanks so much. He is retired Army and almost 50 years old.  This is his military retirement that I was awarded half of in the divorce. 

1099-R. Yes

Code in box 7- 7

[Opus 17]

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@brew717559 wrote:

Thanks so much. He is retired Army and almost 50 years old.  This is his military retirement that I was awarded half of in the divorce. 

1099-R. Yes

Code in box 7- 7

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I'm going to ask for smarter help than me.

@dmertz 

If you are eligible to do a rollover, then you can take the cash value of your share, put it into your own IRA, and then wait to withdraw it until you are older or you need the money.  But I don't know the rules for military retirement.