While this valuable benefit of divorce, the Qualified Domestic Relations Order (QDRO), may sound like instructions for good behavior during the divorce, it is actually a financial tool. You and your spouse's retirement accounts are as much a part of the marital estate as the house, cars and silverware are, and this powerful legal and financial document allows you to include the disposition of any retirement accounts as part of your divorce proceedings. Regardless of whether or not you live in a community property state or whose money funded the account, you may be entitled to remove funds. To understand more about QDRO's, read on.
Benefits of a QDRO
Normally, a retirement fund like a 401(k) charges a hefty penalty for early withdrawals, since it is meant to remain untouched until your retirement age. With a QDRO in place, however, you can withdraw funds from your spouse's account without incurring any penalty fees whatsoever. The non-owner of the account, referred to as an "alternative payee" is free to invest the funds in almost any manner they choose. It should be pointed out that only those funds placed into the account after the date of marriage are available for QDRO purposes.
Important Timing Matters
It's in your best interest to get your QDRO filed as soon as you and your spouse can agree on the disbursement. Your divorce judge must approve the QDRO before your divorce decree becomes final. It should be noted that the QDRO can only be granted with a divorce, but it is not necessarily a part of the actual agreement. You must have a separate document, apart from the agreement, for the QDRO to be legal and binding.
While the document is separate, the issues of martial property are interwoven with the QDRO. Every fund handles disbursements in their own way, and the fund may be distributed lump sum or as a monthly or periodical disbursement. Since this asset is part of the property of the marriage, the divorce agreement may hinge on the amount, the disbursement schedule, and more details. Having the QDRO in place as soon as possible could ensure the fairness in the settlement of other property. For example, a spouse may agree to give up their interest in a vacation home in lieu of a large QDRO disbursement.
Points to Consider
- One of the main benefits of a QDRO is to help even the playing field for spouses who chose to stay home and raise children, thus missing out on the salary and retirement fund benefit. With a divorce and a QDRO in place, the stay-at-home spouse could begin their own retirement fund.
- While there are no penalties for early withdrawal, the funds from a QDRO are taxable as income. You must "roll" the funds into another qualifying account vehicle by a certain date to avoid paying taxes on the income.
For more information, contact Law Office of Shelli Wright Johnson or a similar firm.Share