What kind of TRUST can money coming out of retirement account be transferred to?

[help_me_learn]

What is the name of your state? NY

Can money coming out from a 401K or 403B plan pursuant to a QDRO be transferred directly into:

1) Irrevocable Trust where I am a beneficiary?
or
2) Special Needs Trust that someone else set up for me?
or
3) Special Needs Trust that I set up for myself?

Will doing this avoid me having to pay taxes on the amount transferred?
Will doing so stop the 401K or 403B from withholding 20% from the amount being transferred?

Is it possible to withdraw a portion of the money directly to me and a portion to one of the above mentioned trust?

Are there any other taxes and/or fees that I may have to pay on the amount being transferred or withdrawn?

Thank you

 

[quincy]

Here is a link to your thread from Wednesday:

https://forum.freeadvice.com/threads/irrevocable-trust-situs-question.660165/

 

[Taxing Matters]

A QDRO simply splits the retirement account, creating a separate account for the nonemployee spouse that he or she then treats just like any other retirement account he or she has.

What is the name of your state? NY

Can money coming out from a 401K or 403B plan pursuant to a QDRO be transferred directly into...

Assuming that you are the owner of the retirement account you may ask the pension trustee if he or she will send your distribution directly the trust. But understand that it still gets treated as though the check was sent to you and then you put the money in the trust.

Will doing this avoid me having to pay taxes on the amount transferred?

No.

Will doing so stop the 401K or 403B from withholding 20% from the amount being transferred?

The withholding will be done the same as if the distribution check was sent to you.

Is it possible to withdraw a portion of the money directly to me and a portion to one of the above mentioned trust?

Ask the pension trustee.

But again, it will all be treated as though you got the entire distribution and then you put part of it in the trust.

 

[LdiJ]

If you don't want to pay tax on the money now, then simply don't take a distribution, or if you do, roll the money into another qualified retirement account.

 

[help_me_learn]

So I will have to open an IRA and place the IRA inside a Special Needs Trust beforehand?

Then, ask the plan administrator, via QDRO to transfer the funds into the IRA?

And doing so avoids all income taxes due, correct?

 

[Taxing Matters]

So I will have to open an IRA and place the IRA inside a Special Needs Trust beforehand?

Then, ask the plan administrator, via QDRO to transfer the funds into the IRA?

And doing so avoids all income taxes due, correct?

No. First, under ERISA (which is the law that provides for most of the non tax rules for employee plans) an order dividing the plan in the divorce only qualifies as a qualified domestic relations order (QDRO) if the order provides for payment to an "alternate payee". As the Department of Labor (DOL) notes: "For purposes of the QDRO provisions, an alternate payee cannot be anyone other than a spouse, former spouse, child, or other dependent of a participant." So, the QDRO must specify you as the alternate payee in order to be a QDRO in the first place. So you have to start out with a plan that is in your name.

Nor would a rollover from that account in your name to an IRA in the trust help you avoid the tax, either. A rollover only works to defer tax the distribution if rollover is to another qualified plan/IRA that YOU own or are deemed to own under the tax law (e.g. a grantor trust or a LLC that is disregarded and treated as a sole proprietorship). A transfer to an IRA held by a special needs trust that is not a grantor trust is not a transfer to an IRA that you own — the TRUST owns it — and thus will not qualify as a roll over. Again, the distribution would be treated as a distribution to you and then you contribute that money to the trust and would be taxed accordingly with the distribution being taxable income to you.

 

[LdiJ]

No. First, under ERISA (which is the law that provides for most of the non tax rules for employee plans) an order dividing the plan in the divorce only qualifies as a qualified domestic relations order (QDRO) if the order provides for payment to an "alternate payee". As the Department of Labor (DOL) notes: "For purposes of the QDRO provisions, an alternate payee cannot be anyone other than a spouse, former spouse, child, or other dependent of a participant." So, the QDRO must specify you as the alternate payee in order to be a QDRO in the first place. So you have to start out with a plan that is in your name.

Nor would a rollover from that account in your name to an IRA in the trust help you avoid the tax, either. A rollover only works to defer tax the distribution if rollover is to another qualified plan/IRA that YOU own or are deemed to own under the tax law (e.g. a grantor trust or a LLC that is disregarded and treated as a sole proprietorship). A transfer to an IRA held by a special needs trust that is not a grantor trust is not a transfer to an IRA that you own — the TRUST owns it — and thus will not qualify as a roll over. Again, the distribution would be treated as a distribution to you and then you contribute that money to the trust and would be taxed accordingly with the distribution being taxable income to you.

Help Me Learn, in case you do not understand this, I am going to be blunter.

You have to roll the money into a qualified retirement account that is in YOUR name, if you don't want to pay tax on the money. Forget the whole idea of putting the money in a trust for now. Later on down the road if you really want the money in a trust you can put it there, but for now, forget that entire idea.