A few weeks ago, we introduced a novel planning concept; the marital “Qualified Domestic Relations Order” (QDRO). Most people associate a QDRO with divorce, but divorce is not required to take advantage of this planning technique. The ERISA laws made an exception for early withdrawal penalties with the QDRO. As we know, an ERISA type retirement plan like a 401(k), pension plan or 403(b) (for purpose of this blog I will refer to all as a retirement plan) requires minimum distributions (RMD) and thus tax liability on withdrawals beginning no later than April 1st following the calendar year the participant reaches age 70 ½. Also, the ERISA laws penalize most withdrawals of retirement money if done before age 59 ½ (10% penalty) in addition to the income tax liability.
In our previous blog on this subject, we explored the idea of deferring the RMD and tax liability by obtaining a QDRO from a court, allowing for a transfer of your retirement plan to a younger spouse’s IRA, which allows for self-directed investments and deferred tax liability and possibly lesser tax rate.
Another planning opportunity is available. Example: suppose a younger (under the age of 59 ½) spouse has a retirement plan and the couple desires to access the funds for debt reduction that might be strangling them, but the 10% penalty and income tax liability deters that decision. The QDRO can allow for the younger spouse to transfer her retirement fund to an IRA of a spouse over the age of 59 ½ and then access the funds with no penalty.
If you would like more information on this unique opportunity call us.
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