Qualified Domestic Relations Order for 401(k)

A Q&A on TurboTax site -

"Do I have to pay PA taxes on my RMD from my 401K after age 72?"

"No, Pennsylvania is one of the friendliest states for retirement income tax-wise. While PA does not exclude retirement contributions from taxation like the federal government does (i.e 401(k) pre-tax), PA fully exempts most retirement withdrawal income from taxation. As long as you have met the requirements of your plan for withdrawal (i.e it's not an early withdrawal), which it appears you have - your retirement income will not be taxed by PA.?"

I am, however, concerned about the QDRO. A properly executed QDRO transfers the asset (The 401(k), IRA, etc) pre tax, and the beneficiary should have control of withdrawals. Adding an $80K lump sum to anyone's income all in one year is not the best move, tax-wise. From the details you gave, the QDRO was not handled ideally.

A properly executed QDRO merely requires the plan administrator to act upon receiving the court order. This might be splitting the assets and creating a retirement account for the receiving spouse (a nontaxable event). This might also be withdrawing the funds and submitting them to the receiving spouse. This would be a taxable event requiring 20% income tax withholding.

I'll defer to you on the facts. In my opinion, the lawyer for the spouse should have ensured the assets to be acquired should have remained pre-tax. There was a cost/penalty in how it was done which could have been easily avoided.

My comment was merely making the point that your use of the term "properly executed QDRO" does not solely mean that the plan is split between the two spouses. I have seen more than one QDRO that required the funds to be delivered to the other spouse because the cash was needed. There is no early withdrawal penalty on a QDRO distribution.