Family Law

Q: I am going through a divorce in which I will receive a settlement from my soon to be ex-spouse's employee-based pension plan and voluntary savings plan.

I was told I would be taxed on the pension plan distribution if I took the amount as cash and did not roll it over into my retirement plan.

Does this also apply to the voluntary savings plan?

A: Yes, if the voluntary savings plan is a qualified plan, meaning contributions to the account and the earnings made on that money are not taxed until it is withdrawn, then you will be taxed on the amount you take out as cash, says Kathy Ploch, a certified public accountant with Zientek & Co. in Houston.

The normal penalty for taking out premature distributions before the age of 59 1/2 is 10 percent, says Ploch, president-elect of the Houston Society of CPAs.

There is an exception to the penalty for distributions from qualified plans if the distribution is made through a qualified domestic relations order, which is also known as a QDRO, or quadro.

Also, if the voluntary savings plan is a qualified plan, and you take a regular distribution, the tax-deferred earnings and the tax-deferred contributions could be rolled over tax-free, Ploch says.

There are several IRS publications that can give you more information about retirement (publications 590, 575 and 939) and divorce (publications 504 and 555). Go to irs.gov to access them.

However, I caution you not to rely on your own research to make these decisions. Consult with a financial planner or CPA before making final the terms of your divorce and financial settlement. Your age, dependents and health are all factors that must be considered as you plan for a future without your spouse.

Thanks to the Houston Chronicle.