How QDROs work in a divorce

On Behalf of | Apr 9, 2017 | Divorce | 0 comments

Many Tennessee residents these days find themselves faced with the possibility of splitting retirement account assets when getting divorced. Even though such accounts are held in one spouse’s name only, Forbes reminds people that these assets are very commonly considered part of a marital estate.

Before proceeding ahead blindly and simplifying outlining how a 401K’s value might be split between spouses after a divorce in a divorce decree, spouses should take care to get a qualified domestic relations order in place. The law precludes any distributions from being paid to non-account owners and it also assesses taxes and penalties on distributions taken by account owners for non-retirement purposes. A QDRO may help account owners avoid these taxes and penalties and allow money to be transferred to the non-account owning spouse.

The U.S. Department of Labor explains that a qualified domestic relations order is a court order that establishes the other spouse as an alternate payee on the 401K. It is important to note that not every type of retirement account requires a QDRO for these purposes. For those like 401Ks that do require QDROs, the ability to avoid losing a large sum of saved asset to taxes and penalties is huge.

Spouses who receive money pursuant to a QDRO may also be able to avoid the taxes and penalties if they reinvest the money into another retirement account. A QDRO must be approved by the plan administrator before being finalized and allowing time for this in the process is very important.