Avoiding QDRO Early Distribution Penalties

In many cases, when a Qualified Domestic Relations Order (QDRO) is used to divide a retirement account during divorce, the alternate payee (the one receiving the distribution) simply rolls the amount over into their own retirement account. These straightforward rollovers result in no tax liability. However, in some situations, the alternate payee elects to receive some cash from the distribution.

While income tax liability is always triggered by such decisions, the alternate payee can avoid the early distribution penalty. How? By electing to receive the cash at the same time he or she elects the form of distribution before the rollover of the benefit into his or her eligible plan. If done simultaneously, then the penalty is avoided. However, if the alternate payee rolls everything over and then decides to extract cash, the penalty will be applied.

It is important to recognize this nuance, so you can avoid unnecessary penalties that will eat into the alternate payee’s share of the marital estate.

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