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Dear Tax Talk,
I am 61 years old, working and going through a divorce, which is in its final stages. I was married for 27 years and my soon-to-be-former spouse works for the government. I am entitled to his two pensions (Thrift Savings Plan and the Federal Employees Retirement System). I will get approximately $200,000 from one account and would like to know how much of a tax penalty it would be on the $50,000 I plan to withdraw. Thanks.
— Marilyn
Dear Marilyn,
If you are going to be entitled to your former spouse’s retirement plan as a result of your divorce and there is a Qualified Domestic Relations Order, or QDRO, issued to the retirement plan, then you will report payments received as if you were the original plan participant.
A Qualified Domestic Relations Order, or QDRO, is a legal judgment, decree or order for the retirement plan to pay child support, alimony or marital property rights to a spouse, former spouse, child or dependent of a plan participant.
A QDRO must include the amount or percentage of your former spouse’s benefits to be paid to you.
In your situation, this means you step into the shoes of your former spouse. Additionally, the pension plan administrator will even allocate a share of your former spouse’s cost investment in the contract, if that is applicable in your situation. So, for example, if your former spouse has a total of $400,000 in the pension plan and had a cost investment of $100,000, you would be entitled to $200,000 with a cost investment of $50,000, assuming you’re entitled to half of the plan’s value.
This means $50,000 of the distribution would be tax-free. However, the tax-free portion will be allocated on a pro-rata basis, proportional to the amount distributed.
If you withdraw $50,000 from the account, you will be issued a Form 1099-R, which will include the “gross distribution” in box 1 and the “taxable amount” in box 2a. You may want to contact the plan administrator for information on what amount will be included in box 2a, as that is the amount you will include in your income.
You have not provided me with enough information to calculate the amount of tax due on this transaction, so you may want to sit down with a tax professional to help you with this. Getting divorced will require you to understand the financial aspects of your new life.
Thanks for the great question, and all the best to you as you move forward.
To ask a question on Tax Talk, go to the “Ask the Experts” page and select “Taxes” as the topic. Read more Tax Talk columns.
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