The benefits of the QDRO
A Qualified Domestic Relations Order is the way to avoid unnecessary taxes when splitting 401K accounts in a divorce.
Retirement accounts are commonly split in many divorces in Georgia today. Because these funds can be some of the largest financial assets spouses share, it is both difficult and important to properly assess who shall receive what portion. Of equal importance is ensuring that any division of retirement assets is processed properly.
The big potential problem
An article in Forbes gave details about a husband who found himself faced with a $5,268 tax bill rather unexpectedly. Pursuant to his divorce and instructions from the judge in the family court, he withdrew money from his 401k to pay spousal support to his former wife. The tax bill he ultimately received represented 10 percent of what he had paid his ex-spouse.
Despite the divorce decree order, the Internal Revenue Service deemed the withdrawal of funds to be an early withdrawal and thereby penalized the account holding husband accountable accordingly.
How can this be avoided?
The website for the U.S. Department of Labor indicates that the use of a Qualified Domestic Relations Order can avoid the taxation that the husband in the above example was forced to pay. Essentially, a QDRO is a way of establishing a legally recognized alternate payee for a designated retirement account. This person can receive benefits and distributions as though they were the plan participant.
The Internal Revenue Service website notes that a QDRO can be used for orders to split accounts as part of a marital property division agreement or to make support payments for children or spouses. An alternate payee can only be a current or former spouse or dependent such as a child.
When a distribution is initiated as part of a property settlement, the receiving spouse will not need to pay taxes on that distribution as long as the money is reinvested into a qualifying account.
How does the QDRO work?
Any QDRO must clearly provide information about the alternate payee, the plan and the amount or percent to be distributed. It should also stipulate if there is to be one or more payments and the timeframe in which payments are to be made.
Not all retirement accounts can be split using a QDRO, however. This order is for 401K or 403b accounts. Other funds, such as Individual Retirement Accounts utilize other processes for the same purpose.
How can spouses be protected?
With so much on the line in the form of lost assets and undue taxes, it is important to work with the right professional when getting divorced. Georgia residents should always seek to work with an experienced attorney in these situations.
Keywords: QDRO, Retirement, divorce, funds, finance, spouses share