QDRO

[Guest debbie2222@charter.net]

My husband and I were divorced this past June, 2007. A QDRO Order was included in our Divorce Decree.

I am the 'Alternate Payee' and agreed to receive a specific sum of my husband's 401K -- $11,000.00. (Approximately half.)

Here are my questions, as his Company has now approved the Judge's Order:

1) They have informed me that I can take a 'lump sum payment' which I plan to do, unless you advise otherwise.

2) They have stated that I will not be subject to the 10% Early Withdrawal Penalty. Is this true?

3) I do not understand the tax situation. Will a certain percentage of taxes be automatically deducted from my $11,000.00 and sent to the IRS? If so, will it be 10%, 20%, or more? Also, I've read that 'some' States also deduct a certain amount for State Income Taxes as well. I live in South Carolina, and have not been able to find out if SC is one of these States...?

4) We are both under retirement age. I have, however, been on Permanent Social Security Disability and FERS (Federal Employee Retirement (Disability) System) since 1991 due to a terminal illness that is now in remission. Does my Disability Status have any bearing on the taxes to be assessed to me?

(FYI): Before I married my husband, my yearly income from Disability was/is approximately $12,700.00. I did not have to file taxes for several years, until we were married; then, a certain percentage of my Disability did become taxable because of his added income. Now I'll be able to return to filing just my income again, for 2006 -- plus the $11,000.00 from the QDRO. I'm worried because I do not have a clue as to my income tax bracket and also, if the $11,000.00 will cause me to owe taxes.

Any information anyone may give to me will be greatly appreciated.

Thank you!

Debbie in SC

[QDROphile]

1. That is up to you, but installments of a small amounts usually do not make much sense unless you are on the edge of a tax rate. Also, you should be able to leave the money in the plan until something happens to your former spouse, such as he takes a distribution or reaches retirement age. Many plans try to push out alternate payees. You need to understand the difference between a distribution (getting the money from the plan) and rollover (the money goes to your IRA) because of the different tax consequneces. Whether or not or not you elect to roll over money taken from the plan, you will have a distribution. You can have the money sent directly from the plan to your IRA. That is called a direct rollover, but it is still a distribution. A direct rollover has the best immediate tax consequences. All of your money goes to the IRA (no withholding) and you have no taxes until a later distribution. Before you take a distribution, the plan should give you written information about your distribution options and about rollovers and direct rollovers and the federal income tax consequences.

2. True. If you roll over to an IRA and then take a distribution before age 59 1/2, the penalty will apply unless another exception applies.

3. Check the tax and rollover information from the plan. If you do not elect a direct rollover, 20% will be withheld from your distribution for federal income taxes - lump sum or installment. Also check IRS publications about distributions from retirement plans, available on the IRS web site. The plan should also tell you about state tax withholding, but it may not do so automatically. You may have to ask if state taxes will be withheld.

4. Not as far as the retirement plan is concerned.

[david rigby]

... Many plans try to push out alternate payees....

In case this phrasing is ambiguous to you, "push out" means "encourage to take a distribution".

BTW, call the IRS at 1-800-TAXFORM and order a (free) copy of Publications 575 and 590.

[Guest debbie2222@charter.net]

To both QDROphile and david rigby:

Thank you very much for all of the information you supplied to me.

Since my 'ex' is 13 yrs. younger than I am, waiting for him to reach retirement age is a LONG WAIT, and he always said he never planned to take any distributions.

I've never had a 401K or an IRA. I'm assuming I can set up an IRA at my local bank, "if" I wanted to receive the distribution that way...? It will still be taxable, however, whenever I do choose to take the money out, correct? (And since I am on permanent Disability, eventually I will have to pay taxes on it, so if I could really use the money now I might as well go ahead and take it in one lump sum...?

I will definitely call for those two TAX FORM PUBLICATIONS, 575 & 590, but time is of the essence because his company just sent me the paperwork this past Friday, where I am to select my options for the $11,000.00 I'm entitled to!

I thought I read somewhere that there is an exception to paying taxes on my share of the 401K, as long as I use that money for medical expenses. Have either of you heard of this? (Just curious because I'm still facing 4-5 more surgeries...)

One last question -- Is there any way I can find out NOW just how much I will owe the IRS in taxes, if my total income for 2007 is approximately $23,744 (combined total of my disability income and the $11,000)...? I'm thinking I can most likely itemize all of my medical expenses, which would help to lower my total income.

Any further thoughts from either one of you will be greatly appreciated!

Thanks so much!

Debbie in SC

[QDROphile]

The IRS publications are availabe on line at http://www.irs.ustreas.gov/formspubs/lists...d=97819,00.html. The publications address your questions.

[masteff]

Is there any way I can find out NOW just how much I will owe the IRS in taxes, if my total income for 2007 is approximately $23,744 (combined total of my disability income and the $11,000)...?

You will be partially in the 10% and partially in the 15% tax bracket for federal taxes (depends on your deductions and exemptions).

You will probably be in the 7% tax bracket for South Carolina taxes (but I've never done SC tax return so no idea about exclusions, deductions and exemptions).

[Kimberly S]

Yes, you can open an IRA at most banks. You could also use a brokerage firm or a mutual fund. It depends on the kind of investments you want to use. You should be asking about rates of return and fees as you are evaluating the options.

Even if they sent you paperwork, they are required by law to give you at least 30 days to make a decision. Take advantage of that time to learn about the options and also consult a tax preparer.

[Guest debbie2222@charter.net]

Yes, you can open an IRA at most banks. You could also use a brokerage firm or a mutual fund. It depends on the kind of investments you want to use. You should be asking about rates of return and fees as you are evaluating the options.

Even if they sent you paperwork, they are required by law to give you at least 30 days to make a decision. Take advantage of that time to learn about the options and also consult a tax preparer.

Thank you, again, for all of the information. I truly appreciate it!

I spoke to an advisor at my home banking center yesterday afternoon.

I think I am just going to elect for the payout, and then I will just have to see how much tax I'll have to pay on the $11,000 when I file my income taxes early next year.

The advisor and I agree: I'm going to be staying on permanent disability for the rest of my life, and I really, really need some extra income NOW since my husband left me and our divorce was final earlier this year. Although I am in total remission from a terminal illness that I fought for 8 years, I'm still on several medications and need 4 - 5 more surgeries. I will probably have one or two of those surgeries before the end of this year. I believe I will have no problem being elgible to itemize and deduct all of my medical expenses for this year. So, hopefully, I'll not end up owing very much in taxes on my total adjusted income.

Again, thank you very much for all of the great help!

Sincerely,

Debbie H.