Does a withdrawal from a QDRO account count as investment income?

[ebertwendy]

Wondering if I make a withdrawal from my QDRO account  will I need to claim that as investment income on my taxes. And if I do take a withdrawal from my QDRO will I loose my earned income tax credit?

[Critter · Accepted solution]

The distribution is considered income so even though it is not "investment" income it will reduce or eliminate the EIC credit.   And if you put the QDRO into an IRA then simply refer to it as an IRA distribution since there is no such thing as a QDRO account... the QDRO was just the kind of non taxable distribution not an  investment account. 

[VolvoGirl]

You will get a 1099R for it (not a 1099B for investments).  It will be taxable and included in your AGI so it may affect your EIC credit.

[ebertwendy]

I looked it up and it says you can not claim more than $3.400 in investment income to qualify for the EIC. so I am wondering if a withdrawal from my QDRO account would be counted as investment income?

[VolvoGirl]

No but it will increase your AGI

Both your earned income and Adjusted Gross Income (AGI) may not exceed:
* $15,010 if you're not claiming a qualifying child ($20,600 if filing jointly);
* $39,617 if you're claiming 1 child ($45,207 if filing jointly);
* $45,007 if you're claiming 2 children ($50,597 if filing jointly);
* $48,340 if you're claiming 3+ children ($53,930 if filing jointly).

[ebertwendy]

Thank you!

[ebertwendy]

Also...say I want to withdraw $5000. I know they will take 20% out for Federal taxes. What amount will I have to claim as income on my taxes the full $5000 or $4000 (which is the amount after 20% is deducted.

[macuser_22]

The entire amount.

[VolvoGirl]

FYI  You don’t actually pay the tax or 10% penalty (you pay a 10% early withdrawal penalty if you are under 59 ½).  You had taxes withheld like from your paycheck. You still have to enter the whole gross original amount (before taxes were withheld) with your other income to figure out the total tax (and it may put you into a higher tax bracket) and then the withholding is subtracted from the total tax to figure your refund or tax due.  The withholding will show up on 1040 line 64 or 1040A line 40.  The 10% penalty is on 1040 line 59.

It has to break out and show the 10% penalty separately on your return and then you get credit for all the withholding taken out on Line 64.

And by increasing your income you may lose some credits like the EIC .  You can lose like up to 50% of it for taxes and penalties for federal and state.

[Critter]

FYI ... an IRA  is a Retirement account  not an investment account ... just because you may have the IRA money invested in the stock market doesn't change the nature of the beast.