Handbook-Divorce and taxes

Divorce and taxes: Dividing retirement savings
when love hurts
When retirement plan assets are divided after a divorce, taxes can hurt. Learn how qualied
domestic orders and post-divorce property transfers can help.
By: Alison Flores / February 13, 2020
Dividing assets in a divorce is a complicated nancial issue. Retirement plan assets and the family home
often represent some of the most valuable assets a couple owns. Splitting these assets can be
contentious and involve attorneys, nancial planners, and tax advisors. The tax implications of dividing
retirement plan savings because of divorce can be complicated and vary based on the kind of property
the former spouse receives.
Qualied domestic relations order (QDRO) for employer
retirement plans
If a plan participant simply takes a retirement distribution and writes a check to the former spouse, the
plan participant will owe income taxes on the distribution (and 10% additional tax if it is an early
distribution), not the former spouse. The plan participant will receive Form 1099-R and report the taxable
income and any additional tax on their federal income tax return.
To move the responsibilities for income and early distribution taxes to the recipient spouse, the plan
participant can use a qualied domestic relations order (QDRO). A QDRO is a court order that gives rights

to an alternate payee (usually the former spouse). A QDRO species the benets to be paid to the
alternate payee. A QDRO may relate to marital property rights, child support, or alimony.
When a QDRO is used to transfer assets to an alternate payee who is a former spouse, the former spouse
will receive Form 1099-R and report any taxable income on the distribution. The 10% additional tax on
early distributions never applies when a distribution is made pursuant to a QDRO. The age of the
participant and the alternate payee do not impact the original QDRO distribution. However, if the alternate
payee rolls over the distribution to an IRA, a later distribution may be subject to the 10% additional tax.
Because of the complexity involved in drafting a QDRO, and the differences among plan rules and payout
options, it’s generally advisable to consult an attorney for assistance with a potential QDRO.
In summary: transferring plan assets using a QDRO is essential to ensuring the
recipient spouse is liable for tax on any retirement plan distributions they receive.
Caution: Similar tax impacts can be accomplished under some plans sponsored by federal, state, or city
entities and tax-exempt organizations. While these plans may not utilize the QDRO procedure, an attorney
can help determine what options are available for these plans to accomplish similar results.
Transferring individual retirement arrangement (IRA) assets
pursuant to a divorce decree
Similarly, if an IRA owner takes a distribution and simply writes a check to the former spouse in a divorce,
the IRA owner will receive Form 1099-R and report the taxable income and any additional tax on their
federal income tax return, not the recipient spouse.
Unlike employer plans, QDROs cannot be used for IRAs. Instead, an IRA can be divided between former
spouses by directly transferring assets from the original owner’s IRA to the IRA of the former spouse. The
transfer must be made pursuant to a divorce decree or legal separation agreement. When this occurs, the
transfer is tax-free. The recipient spouse is subject to tax on subsequent distributions. The 10% additional
tax would apply to subsequent distributions if the recipient spouse is not yet 59 ½. For traditional IRAs, a
recent change means required minimum distributions (RMDs) would rst be required when the recipient
spouse attains age 72.
If the original IRA owner had basis in any IRAs, basis for the benets transferred must be allocated to the
recipient spouse. Basis should be allocated based on the value of the IRA the recipient spouse receives
and the entire value of the original IRA owner’s IRAs.
Rollovers to a former spouse’s IRA
Former spouses may also rollover the QDRO benets to their own IRA, or may rollover from an IRA to
another IRA. A rollover may be accomplished easily through a trustee-to-trustee transfer.

If a trustee-to-trustee transfer is not utilized, a rollover from a qualied plan to an IRA, or an IRA to an IRA,
may only occur if the distribution is rolled over within 60 days of receipt. But because distributions not
made through a trustee-to-trustee transfer are generally subject to 20% withholding, an individual
attempting a rollover on their own, needs to consider how and whether they can restore withholding on
the distribution with cash from another source.
QDRO transfers may be more advantageous under new alimony
rules
A recent change in how alimony payments are treated for tax purposes may make use of QDROs more
advantageous for some taxpayers than alimony. Here’s the change and its effect.
For divorce decrees nalized before 2019, alimony payments are deductible by the paying spouse and
reported as taxable income by the recipient spouse. This is like the tax treatment of retirement plan
distributions under a QDRO.
For divorce decrees nalized after 2018, alimony payments are not deductible by the paying spouse, and
the recipient spouse does not pay taxes on alimony. Because the paying spouse is generally subject to
higher tax rates than the recipient spouse, it may be advantageous to consider using a QDRO rather than
alimony to shift tax liability.
Divorce and social security retirement payments
Social security is an important component of retirement income streams, yet cannot be divided like other
types of plan assets. QDROs can’t be used to divide social security retirement payments. However,
taxpayers who were married 10 years or longer may be eligible to receive benets based on their exspouse’s
record after divorce. This is possible if the benets an individual is entitled to receive based on
their own work are less than they would be eligible to receive based on their ex-spouse’s work. The
maximum benet based on the ex-spouse’s work is equal to one-half of the ex-spouse’s full retirement
amount.
For more information about Social Security retirement payments based on an ex-spouse’s work, see “If
You Are Divorced” and “Benets For Your Divorced Spouse” from the Social Security Administration.
Conclusion: We can help
Sometimes, love hurts. Unexpected tax bills are painful especially after the dust settles on a divorce
proceeding. Taxpayers considering divorce or in the process of divorcing should work with their legal and
nancial team to understand how splitting up retirement savings will impact their taxes and their
retirement income stream. Not sure how divorce could impact returns? Find one of our experts to help
today.
Related Insights:

• Innocent spouse relief and IRS collections
• How to protect one spouse’s share of a joint tax refund when the IRS can take it
• QOTW: Preserve refund when one spouse owes child support
Alison Flores
Alison Flores, JD, is a principal tax research analyst at The Tax Institute at
H&R Block. Alison specializes in the Tax Cuts and Jobs Act (TCJA) and
individual income tax issues.