Distribution of IRA Pursuant to Divorce

[Academy Tax]

Client's ex-spouse required by QDRO to transfer $20K (partial distribution) from IRA to my client and she required by same QDRO to pay income tax on $20K (both over 59 1/2). Client's ex deposited $20K to client's account during home closing (client bought out ex-spouse interest in the home as also specified in QDRO). I haven't seen the ex's Form 1099-R yet, but there seems to be no direct trustee to trustee transfer. Is this a problem for client's ex? For my client? Would 1099-R from ex to my client be proper?

Ron

[Burke]

I haven't seen the ex's Form 1099-R yet, but there seems to be no direct trustee to trustee transfer. Is this a problem for client's ex? For my client?

Could be. Never heard of a QDRO "requiring" spouse to pay income tax on the distribution. IRA to IRA spouse would qualify as tax free if direct transfer had been made under QDRO. QPP to IRA would qualify under rollover rules. See TTB 13-23, Transfers Incident to Divorce.

[Academy Tax]

as so often happens, people, attorneys and courts just don't think of the tax implications of positions they take and the directives that emerge!

[Burke]

Regardless of what the QDRO said, it cannot supersede federal tax law, and if the distribution satisfies the IRS regulations, then those apply.

[mastertaxguy]

Qdro

Regardless of what the QDRO said, it cannot supersede federal tax law, and if the distribution satisfies the IRS regulations, then those apply.

1. Is possible (and appears likely given the facts as stated) that wife wants to take a direct distribution pursuant to a QDRO and pay the taxes now, rather than later.
2. Perhaps her plans involve larger income in future years at higher tax rates.
3. As this must of have happened in 2014, perhaps she qualifies as HOH and has no other income and thus, the $20,000.00 may be consumed by standard deduction/itemized deductions, exemptions and so on.
4. As unlikely as it may be, the lawyers and the taxpayer may have known what they were doing.
5. The paying spouse wants the QDRO so he doesn't have to pay any taxes on the distribution.
6. Actually, I can see this scenario working quite well.

[Burke]

You are correct in your assumptions. I didn't mean to imply that the more favorable tax treatment was mandatory. I don't think it is. Just that it was available to the receiving TP if it qualified.