During divorce, the division of assets can become a major bone of contention, and retirement funds are considered part of the marital estate. You should know that there are specific laws that deal with the distribution of retirement funds during divorce. The Qualified Domestic Relations Order (QDRO) may sound like a divorce behavior guideline, but it is instead a federal law designed to allow certain types of retirement accounts to be distributed during a divorce. To learn more about this valuable benefit for your financial future, read on.
The Funds and Who Owns Them
No matter who worked and added the funds to the retirement account, the money in that account is marital property and is subject to being divided. The funds added to the account since the date of the marriage are fair game, with few exceptions and the distribution of the funds are addressed using a QDRO. It's important to note that the fund's owner (the spouse who funded the account) cannot use a QDRO to claim funds without paying a penalty, only the non-owning spouse (called the alternate payee) may receive those funds.
Benefits of a QDRO
Normally, funds from a retirement account, such as a 401(k), cannot be withdrawn without incurring a penalty. With a QDRO in place, however, some or all of the funds in the qualified account may be withdrawn without penalty during a divorce. This provision can greatly benefit spouses who stayed home and cared for the children of the marriage, but did not earn income for all or part of the time. If the divorcing couple cannot agree on a disposition of the retirement fund, a judge may have to intercede.
Drafting a QDRO
The drafting of a QDRO can be tricky. Every plan and every state has very specific guidelines about the QDRO, so do not attempt to create your own QDRO, even using a template, or you might find yourself back in court with a useless document. It should be understood that a QDRO is a separate, but related, document to the divorce decree and the mere mention of a QDRO in the agreement is not sufficient.
Timing the QDRO
Since the retirement fund is considered marital property, the QDRO is best completed during the divorce process. The entire marital estate must be considered, so a QDRO and a divorce decree that work in concert with each other is preferable. For example, some funds may allow the money to only be distributed on a monthly basis, instead of lump sum. This could influence how other marital property is distributed.
A QDRO is Considered Income
While the penalties for early withdrawal are waived when using a QDRO, taxes are not. You can, however, avoid paying taxes if the funds are "rolled into" another qualifying account by a certain time.
Speak with a family law attorney like Karie L. Sanoba, Attorney at Law to learn more.