During a divorce, the court decides how spouses will split assets such as real estate, vehicles, furnishings, valuables, and cash. Retirement accounts, however, are divided a different way, using a qualified domestic relations order (QDRO). As you and your spouse negotiate your separation through divorce lawyers, it's important to understand what a QDRO does and how it can affect your future.
A Brief Guide to QDRO in Divorce
What is a QDRO?
A qualified domestic relations order allows more than one person to receive benefits from a retirement plan. In a divorce, the order recognizes that you have a claim to a portion of your spouse’s retirement accounts. The QDRO specifies a percentage or dollar amount that belongs to you, the alternate payee. The order can be drafted by you and your spouse's divorce lawyers and then submitted to the court.
Does QDRO cover all types of retirement plans?
A QDRO applies to any retirement or pension account covered by the Employee Retirement Income Security Act (ERISA), such as 401(k), 403(b), and an employee stock ownership plan (ESOP). An individual retirement account (IRA) does not fall under a QDRO; one can be split up using a court action called a transfer incident to divorce. The ERISA also doesn't cover pensions from the military and federal, state, and municipal governments.
What are the tax implications?
If you are under the age of 59 1/2, any funds taken from a retirement account are subject to a 10% early withdrawal penalty fee from the IRS. However, under a QDRO, the spouse who makes the payout is exempt from the penalty. The alternate payee is not taxed either, as long as the money is transferred to another retirement account.
How does the QDRO payout work?
A QDRO payout can take several different forms, depending on the retirement plan's stipulations. You may be able to get the payout in cash, either by lump sum or annuity, but the funds would be subject to taxation. If you want to avoid that, most plans allow a QDRO payout to be rolled over tax-free into an IRA owned by the alternate payee.
If you need help with the finances of a marital separation, trust the experienced divorce lawyers at Bodeux Law Group. They provide quality legal counsel and representation to clients in Saint Charles, MO, and across Warren, Lincoln, and St. Charles counties. Headed by attorney Bradley Bodeux, the team offers expertise in family, personal injury, estate planning, and criminal defense laws. Call (636) 949-0010 to schedule a free consultation or visit their website to learn more about the firm.