Part of the disentangling of your relationship will likely involve the separation of martial debt and property. Marital property can include valuable items like real estate, vehicles, art, jewelry, and more. One marital asset that divorcing people tend to overlook is the funds in their spouse's retirement account. Not only are these funds part of the marital estate, but special provisions and orders have been created to allow for spouses to share those funds when divorcing. Read on to learn more about how you can help create a more secure financial future for yourself and your children by taking advantage of a Qualified Domestic Relations Order (QDRO).
What is a QDRO?
This legal procedure uses the divorce event to trigger the availability of funds in certain types of retirement accounts, such as a 401(k). Under normal circumstance, these funds are not available for withdrawal without a monetary (usually a percentage) penalty. A QDRO allows those funds to be made available for an "alternate payee", which is the divorcing spouse of the fund's owner.
How is a QDRO accomplished?
Simply mentioning a QDRO in a divorce petition is not sufficient; there must be a separate order signed by a family law judge. The timing of the QDRO is important: it must be completed and signed prior to the divorce being final, but the divorce property settlement should be complete before accomplishing the QDRO. The QDRO should be filed with the retirement fund's administrator.
Why should the QDRO be complete only after the property settlement?
While there is no specific requirement in this regard, the QDRO and the funds available to the alternate payee are part of the marital property, sometimes a very large part. It should be noted that only the funds placed into the account during the marriage are available as marital property. Failing to take these funds into consideration could result in an unfair settlement for one party. For example, the alternate payee could agree to give up the family home in exchange for the funds in the 401(k). Additionally, the manner that the funds are distributed can vary, so a lump-sum payout could have different implications for the settlement agreement than periodic payouts.
What about taxes?
While the receiving spouse can receive the QDRO funds without penalty, the funds may still be taxed as income. You can "roll" the funds into another qualified account to delay the need to make tax payments, however.
A QDRO can be a valuable, but complicated, facet of divorce property, so speak with a divorce attorney at a law firm such as The Law Offices of Paul F. Moore II for more information.Share