... back in the saddle now.
Again, a property settlement in a divorce is not taxable ...
For example, if you had to split up land in your name and give her 1/2 ... that would not be taxable to her, nor would there be a tax deduction for you.
The thought is ... that a divorce property settlement is an awarding of property that was bought with after tax dollars. For most property, the tax has already been paid on the income (withheld from your paycheck, for example) that was used to buy that property.
The QDRO, as it is used with qualified plans, is just a way to make the awarding of some or all of a qualified plan exactly the same as any other settlement award ... (the person getting it will have the tax implications of selling it or using it)
For example ... in the land example, above, her tax BASIS in the land would be the same as it always was, so that if she sells the land, SHE has to pay the capital gains
on that property... even if you originally bought it for a dollar.
Here's a great article on that issue: http://divorcesupport.about.com/od/taxesanddivorce/f/settlementtaxes.htm
In the case of the QDRO,you actually get 2 (VERY SMALL) breaks, compared to all the other property settlements ...
(1) where the land goes to her AFTER you paid taxes on your income (salary or whatever bought that land) ... you acquired the 401(k) with Pre-tax dollars.
(2) This one's really more of a bad deal for her that a break for you, ... but on the land, if she sells it she only pays the lower capital gains tax ... on the 401(k) it's all ordinary income
AND that pre-59 and 1/2 tax penalty on top her regular income taxes
, when she uses IT.
Here' the IRS guidance on the three issues here ...
(1) settlements are not taxable OR deductible (including QDROs)
(2) Alimony IS deductible (and taxable to the receiver)
(3) QDROs protect you from being punished twice (having to give away the property AND having it be taxed as well)
And here's a good article on QDROs (used for qualified plans):
Hope this helps
Positive feedback is appreciated...that's the only way I get credit for the work. Thanks