As the nonmember spouse, do I pay taxes on payments made from the QDRO?

The answer is YES! One of the purposes of a QDRO is to allow for the nonmember spouse (alternate payee) to pay taxes on any benefits paid to the alternate payee instead of a participant.

If the alternate payee is not rolling over funds to an IRA or other defined contribution plan, then the alternate payee will pay taxes on whatever payment is made to the alternate payee from the plan with a valid QDRO. Generally, the participant does NOT pay taxes on the alternate payee’s share unless the QDRO is for support.

If the alternate payee wishes to roll over alternate payee’s share to an IRA or other qualified plan, then the alternate payee is not subjected to taxes or penalty in that transfer. But if the IRA holder then withdraws funds from that IRA, that IRA holder would be subject to all applicable taxes.

Notwithstanding the foregoing, when a transfer from a defined contribution plan is made pursuant to a QDRO, if the alternate payee wishes to receive those funds as CASH and NOT roll them into an IRA or other qualified plan, then the alternate payee’s funds will be subjected to taxes but NO tax penalty for early withdrawal if the alternate payee is younger than 59.5. See Internal Revenue Code Section 72(t)(2)(C). The alternate payee should check with your CPA to see if he/she should take advantage of this tax benefit. QDROCounsel is not involved with any tax issues.

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