Benefiting From A QDRO With Your Divorce
Most people recognize that when you divorce, your marital property, such as real estate, stocks, bonds, and household vehicles, are normally divided. What some people may not know, however, is that certain types of retirement accounts also fall into the marital property category, no matter whose name is on the account as owner or who actually provided the money to fund that account. Not knowing about this legal mechanism for ensuring that you get your fair share of that money could put you at a severe financial disadvantage, especially when it comes time to retire. To learn more about how a Qualified Domestic Relations Order (QDRO) could benefit you when divorcing, read on.
What is a QDRO?
Simply put, a QDRO is a method of withdrawing funds from certain types of retirement accounts, like a 401(k), without incurring early withdrawal penalties. Funds deposited from either spouse during your marriage are eligible for a QDRO, which can be distributed to the non-owner (called the alternate payee) of the account . Funds deposited prior to marriage are exempt for QDRO purposes.
The Timing of the QDRO
Taking care of a QDRO should take on a priority during your divorce process since it must be both approved by the family law judge and filed with the retirement plan's administrator before your divorce becomes final. It's recommended that the formation of the QDRO be accomplished at the same time that you and your spouse are preparing your marital settlement agreement, since debt and property divisions are closely tied to the provisions of the QDRO. For example, you and your spouse may agree to substitute certain property in lieu of disturbing a retirement account.
It's important to note that the QDRO is a completely separate document from your divorce decree. While the QDRO is meant to work in tandem with your divorce agreement, you should not include mention of the QDRO in your agreement. The QDRO without the divorce is useless, since only a divorce entitles the alternate payee to the funds.
Important Points to Keep in Mind
The QDRO provides a valuable benefit to the payee, since penalties for early withdrawal can be substantial. However, it's vital to have a complete understanding of the possible tax consequences, since the funds are taxed as income on the alternate payee's income tax return. Taxes may be avoided by "rolling" the funds into a another qualified retirement account, such as another 401(k). These funds must be deposited by a certain date to avoid the taxes due. Some types of retirement accounts, such as Individual Retirement Accounts, have different rules when it comes to the division of marital property.
A QDRO can be of valuable service to spouses who have forgone traditional career plans to stay home and care for children, since it can help lessen the financial impact of divorce and can help start or supplement a retirement fund. Discuss the possibility of a QDRO with a divorce attorney in your area early on in the divorce process to give you adequate time to formulate and file the plan.