In order to divide retirement plans in a divorce, qualified plans need a Qualified Domestic Relations Order (QDRO) to divide tax free. A QDRO will allow the plan to be paid out to the alternate payee (non- employee spouse) without tax consequences to the employee.
A QDRO is not used to divide IRAs which can be divided under IRC §408.
QDROs cannot be used to divide stock options or non-qualified deferred compensation plans.
Benefits under a QDRO may be rolled over tax-free into an IRA or other qualified retirement plan. Any amounts not rolled over will be taxable to the alternate payee - the spouse receiving the benefits.
A QDRO which allows a one- time withdrawal by the alternate payee without the early withdrawal penalty (IRC §72(t)(2)(C)). Ordinary income taxes are still due on these withdrawals.
Withdrawing funds from an IRA to satisfy a divorce judgment will result in the IRA owner to be taxed on the distribution as well as the 10% early withdrawal penalty.
Divorce agreements should always state that any retirement transfer is intended to be tax free.
If you are seeking a QDRO, you can contact me at Amanda@gordonfamilylaw.com for more information.