QDRO basics and benefits
Whether dividing a 401K account or needing to access 401K funds to pay alimony or child support, a QDRO should be used.
California spouses who have made the choice to end their marriages have plenty of things to be concerned about. There are many losses that come with a divorce that cannot be avoided including the loss of one’s dreams for a lifelong future together. Knowing that this is the case, it can be all the more important to avoid any losses that may in fact be able to be avoided.
The use of a qualified domestic relations order when splitting a 401K account as part of a property division settlement may give people the ability to minimize losses.
What is a qualified domestic relations order?
As explained by the U.S. Department of Labor, a QDRO is a legal order that establishes another person as legally allowed to receive money from another person’s 401K account. This person is referred to as an alternate payee.
So, for example, if a couple is supposed to split the assets in one spouse’s 401K account when getting divorced, the spouse who is not named as the account owner would be identified as an alternate payee. They would then be allowed to receive the amount stipulated in their divorce agreement.
Isn’t a divorce decree sufficient to split a 401K?
Even if a divorce decree specifically states that the money in a 401K account should be shared between both spouses, this is not enough to prevent the account owner from being held accountable for taxes and potentially early withdrawal fees as well.
The Internal Revenue Service explains that with a qualified domestic relations order, when money is distributed to a former spouse, that person assumes tax responsibility. At the same time, the account owner is not assessed penalties for taking money out before retirement. This may help that person to avoid losing more of their retirement savings than they must simply by splitting it with the other person.
If the spouse who receives the money puts that money into another qualifying retirement fund, they may also be able to avoid taxes on the distributions.
What else can a QDRO be used for?
A qualified domestic relations order may also allow a person to tap into their 401K funds in order to satisfy a spousal support or a child support order. If the money is to be used for spousal support it is once again that recipient spouse who assumes tax liability. If money is used for child support, the account owner is responsible for taxes.
How can I learn more about QDROs?
Talking with a lawyer is always recommended when getting divorced in California. Even with community property laws, there are many gray areas and opportunities for people to lose more than they need if proper processes are not followed. Getting legal help may allow people to avoid these pitfalls.
