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Is interest paid in QDRO taxed


Guest intoERISA

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Guest intoERISA

My client divorced her spouse in 2002 and a QDRO was ordered but because of subsequent litigation and other problems the full QDRO right has still not been satisfied. Recenlty, a court ordered a significant interest award because of the delay. The other party proposes to pay the interest in QDRO form. My client's accountant is concerned that the portion of the QDRO attributable to interest might be taxed when the QDRO is entered even if the full award is rolled over to an IRA (DC plan is involved that allows immediate QDRO distribution). -- Is there any way the QDRO might be taxed when entered? 1041 provides for no gain or loss with respect to distributions pursuant to a divorce, but case law says that 1041 does not apply to any portion of such distributions applicable to interest. Will that case law apply to the interest portion of a QDRO?

Thanks in advance.

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I think it depends on who was ordered by the court to pay the interest. If it is the employee, then the case law will apply and the interest paid probably taxable.

However, if the divorce court was concerned about the time value of the benefits to be awarded under the QDRO, then the divorce court should just amend the QDRO to specify the date of division and specify that investment earnings since that date on the awarded portion belong to the alternate payee--and the divorce court rescind the order for interest.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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Guest intoERISA

Thanks for your thoughts. We ended up talking to an IRS GC who saw no big risk substantively (ie 402 trumps the case law requiring taxation of interest on divorce payments) and said there was very little risk that the IRS would ever find out because the QDRO won't mention interest at all--they would have to ask to look at the underlying order which they will never do. So no taxation until distribution of the IRA.

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