What is a QDRO?
A Qualified Domestic Relations Order can help California spouses prevent more loss during a divorce.
According to an article in Forbes, an ex-husband ended up with a surprise tax bill after following the instructions of a divorce court judge. For the man, perhaps the worst part about the situation is that the tax liability was completely accurate. The divorce decree stated that he should pay his ex-wife $52,684 in alimony. In order to do this, he took money from a retirement account. As a result, he was taxed 10 percent of that amount.
Could the taxes have been avoided?
Any time money is taken from a retirement account for purposes that do not meet retirement criteria, it can be identified as an early withdrawal and therefore subject to penalties. That is what happened in the above case. However, there is a legal order called a Qualified Domestic Relations Order that prevents this when the funds are essentially being used to pay an ordered marital property settlement.
Understanding the QDRO
On its website, the Internal Revenue Service describes the Qualified Domestic Relations Order as a way of setting up a second person to be a legal payee under a retirement plan. Thus, when a divorce decree requires that one spouse give a certain portion of a 401K to the other spouse, the receiving person does not need to pay early withdrawal penalties. However, it is important to note that any such distribution should be put into another retirement account.
The U.S. Department of Labor also notes that a QDRO can be used to protect payments for alimony and child support as well. The recipients of these distributions, however, are subject to income tax.
Important facts about the QDRO
If a couple must share any portion of a 403b or 401k account, a QDRO is always advised. When other forms of retirement accounts such as a Simplified Employee Pension are being split, the QDRO is not utilized.
The timing of a Qualified Domestic Relations Order relative to the ultimate divorce settlement is also important. The QDRO must be obtained during the process of the divorce, not after. Waiting too long can cost spouses valuable money.
What to do when getting divorced
Even in a community property state like California, the division of property in a divorce is complicated. Some retirement assets may even be deemed separate property if they were held prior to the marriage. Working with an attorney from the outset of a divorce is always advised and is the best way to protect against unnecessary losses.
Keywords: QDRO, divorce