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Retirement plans.

Tax Facts Q: 3715. How are distributions from a qualified plan taxed?

Hartley v. Commissioner, TC Memo 2012-311

The Tax Court recently ruled that a taxpayer was subject to a 10 percent penalty tax when he took a premature distribution from his qualified retirement plan in order to make alimony payments to his ex-wife pursuant to a family judge's order because the payments were not made pursuant to a qualified domestic relations order ("QDRO").

Premature distributions from qualified retirement plans are exempt from the 10 percent penalty tax if the distribution is used to make a payment to an alternate payee (defined to include a spouse, former spouse, or child of the taxpayer) pursuant to a QDRO.

A court order must meet several requirements to qualify as a QDRO. One of these requirements is that the QDRO must specify the amount or percentage of the taxpayer's benefits that are to be paid to the alternate payee, the number of payments, and the specific plan to which the QDRO applies.

In this case, a formal QDRO containing these details was never prepared. Further, the distribution was made to the taxpayer, rather than directly to the alternate payee, his ex-wife. Because of this, the taxpayer was liable for the 10 percent penalty for premature distributions from his retirement plan.

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Title Annotation:Monthly Round-up
Publication:Tax Facts Intelligence
Date:Dec 1, 2012
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