People who are going through a divorce may have considerable assets to divide. For some, the retirement accounts prove to be a real challenge. If both parties have their own accounts that are relatively equal in value, there might not be an issue since they can each keep their own.
If only one party has a retirement account or if the accounts aren’t fairly equal in value, they may need to be divided. In some cases, this requires you to have a qualified domestic relations order.
What is a qualified domestic relations order?
A QDRO is a legal order issued by a court during a divorce that directs the division of retirement plan benefits between the parties. The purpose of a QDRO is to recognize the rights of an alternate payee, the former spouse, to receive all or a portion of the benefits payable under a retirement plan.
A QDRO is essential for properly dividing retirement assets such as pensions, 401(k) plans or other types of employer-sponsored retirement plans. It ensures that the division of these assets is carried out in accordance with the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code, which governs the tax treatment of retirement plans in the United States.
The QDRO outlines specific details about the division of the retirement benefits, such as the amount or percentage to be paid to each party, the method of payment and any applicable survivor benefits. Once a QDRO is approved by the court and the retirement plan administrator, the alternate payee can receive their share of the benefits directly from the plan, often without incurring tax penalties associated with early withdrawal.
Understanding exactly how a QDRO impacts the property division is crucial. This is only one facet of the split that you need to consider as you’re going through the process.