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A qualified domestic relations order can help people avoid one of the many common financial mistakes when going through a divorce.
Most people in Colorado who have gotten a divorce would agree that the process can be not only emotionally grueling but financially difficult as well. There are many things that make this a reality of the process yet there are some things people can do to protect themselves against some financial losses. Using a qualified domestic relations order when splitting a 401K or other employer-sponsored retirement plan is one of those things.
What is a qualified domestic relations order?
As explained by USA Today, a QDRO is a court order that makes it legally possible for one spouse to receive money directly from the other spouse’s 401K account. These accounts are set up in one person’s name only and that is generally the only person who can take money from them but the QDRO expands that for specific domestic situations such as a property division settlement during a divorce.
Why do I need a QDRO?
If a plan owner withdraws money from a 401K for purposes other than retirement, they may be forced to pay not only income tax on the distribution but also early withdrawal fees. Between the taxes and the fees, a large sum of the savings can be eaten up.
According to the United States Department of Labor, the QDRO bypasses the early withdrawal fees altogether. In addition, because the money is paid to a spouse, the account owner is no longer liable for any taxes. The spouse who receives the money may also be able to avoid the taxes when the money is received by reinvesting it into another retirement fund.
Are there other uses for a QDRO?
In addition to helping couples preserve more of their savings when splitting retirement funds, a qualified domestic relations order has other uses as well. If one spouse is ordered to make child support payments or spousal support payments, a QDRO can allow them to tap into their 401K funds to satisfy these obligations .
If money is taken to pay spousal support, it is once again paid directly to the spouse and the penalty and taxation is handled just as with a property division settlement. If money is taken to pay child support, it can be paid directly to the child or dependent or to a named guardian. However, in this situation it is the plan owner who retain tax responsibility. This is consistent with how taxes for child support payments are handled in general.
How do I know if I need a QDRO?
Anyone who is getting divorced in Colorado should talk with an attorney. Getting help to identify when things like a QDRO are needed is just one of the benefits of working with an experienced professional.
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