Regardless of a person’s age when getting divorced, losing a big chunk of his or her retirement savings can be a hard pill to swallow. Some losses may be unavoidable, such as when the couple agrees to split one spouse’s 401K account.
Other losses, however, may be avoidable if the right steps are taken. Using a qualified domestic relations order may allow a 401K account owner to salvage a reasonable amount of a fund’s value.
The benefit of a QDRO
The United States Department of Labor explains that since retirement accounts are meant to fund retirement, any distributions taken out for other purposes may be subject to early withdrawal penalties. These penalties may significantly reduce the amount of money a person receives as well as the amount of money remaining in the fund.
A qualified domestic relations order prevents the assessment of early withdrawal penalties on all distributions that happen pursuant to the order.
How it works
A QDRO names the spouse of the account owner as an authorized payee on the 401K account. The order then details the payments that must be made to the authorized payee. The order is provided to the plan administrator for review and approval. Once approved, money can be paid to the authorized payee per the QDRO.
Income tax assessment on QDRO distributions
According to the Internal Revenue Service, with a QDRO in place, the authorized payee assumes responsibility for income taxes on all distributions per the order. By putting the money into another retirement account, taxes may be avoided at the time of receiving the money.