The benefits of a QDRO
Arizona residents who are getting divorced and must split retirement may need to use a qualified domestic relations order.
When getting a divorce in Arizona, there may be many assets that spouses end up having to split or give up. Among these assets for many couples are retirement accounts. While splitting a retirement account may well be a relatively common thing in a divorce, spouses should know that great care is required when doing this.
If the plan to be split is a 401K or other type of plan governed by the Employee Retirement Income Security Act of 1974, a qualified domestic relations order should be used.
What is a qualified domestic relations order?
As explained by the Internal Revenue Service, a qualified domestic relations order is a legal order that is able to establish the non-account-owning spouse as eligible to receive distributions from an account. This person is then referred to as an alternate payee. Once this is done, the alternate payee may receive distributions from the 401K account as per the agreement in the divorce.
The divorce settlement is not the only thing needed to create a QDRO. The United States Department of Labor points out that the administrator of the retirement plan must review and approve the QDRO before it can be finalized and put into effect.
What happens without a QDRO?
If a couple needed to split a 401K account and did not have a QDRO, the account owner would need to request a distribution from the fund and then pay the other spouse. However, in the absence of a QDRO, that distribution may be considered an early withdrawal that does not meet retirement criteria. That distribution might therefore be subject to early withdrawal fees and taxes.
With the QDRO, the early withdrawal fees may be avoided altogether. Tax liability is passed onto the spouse who receives the money. Taxes may be avoided at the time of distribution by having the money put into another retirement fund.
Are there are uses for a QDRO?
A qualified domestic relations order may also allow a spouse to be named as an alternate payee for the purposes of receiving spousal support. A child or other legal dependent may be the alternate payee to receive child support. In the latter scenario, the plan participant retains tax liability for any distributions.
How can I establish a QDRO?
The best thing that an Arizona resident can do when splitting a retirement account during a divorce is talk to an attorney. This may help them make sure the right details are taken care of so that they can salvage as much of their retirement savings as possible.