Avoiding Income Tax and Penalties With a QDRO
	General Rule. Federal ERISA law allows you to divide retirement plans in a divorce or legal separation without having to pay income tax or the 10% early withdrawal penalty. Other QDRO uses, such as the collection of child support or maintenance, are also accomplished without having to pay income tax pursuant to the division of a retirement plan.

General Tax Rules for Withdrawal from a Retirement Plan

Whenever a plan participant (employee or former employee) withdraws money from a retirement plan, income tax must be paid on the amount withdrawn. Sometimes a 10% early withdrawal penalty must also be paid. This includes the withdrawal and transfer to a spouse or former spouse.

The QDRO Income Tax Advantage

When a QDRO is used to divide retirement plan assets between former spouses pursuant to a divorce proceeding, the division is done tax-free.

The plan participant (employee) pays no income tax.

The former spouse who is receiving the retirement plan benefits will pay income tax at the time of withdrawal from the retirement plan.

The QDRO Penalty-Avoidance Advantage (But Not From an IRA)

If done correctly, that former spouse can withdraw retirement benefits received through a QDRO without having to pay the 10% early withdrawal penalty.

However, the 10% early withdrawal penalty can be a tax trap if the withdrawal is not done correctly.

For example, if the former spouse rolls the separated retirement assets into an IRA and then withdraws the money from the IRA, that withdrawal is subject to the early withdrawal penalty laws.

So - be careful about how you structure a withdrawal from a QDRO division of a retirement plan.