For many divorcing couples, their retirement savings may be their most significant financial asset that must be addressed during their divorce negotiations. A retirement account is held in one person’s name only yet is commonly split in a divorce. Some people may think that outlining the provisions for sharing these assets in a divorce decree is all that is necessary, but that is not the case.
401K funds distributions
As explained by the U.S. Department of Labor, distributions from a 401K account are intended to be to fund retirement. Any disbursements for other reasons may therefore be assessed a penalty on top of the income tax that would be due on the amount. If an account owner withdraws funds and uses those to pay a former spouse as part of a property division settlement, they will lose a significant amount of their savings to the penalties and taxes.
How a QDRO helps
The Internal Revenue Service notes that a qualified domestic relations order enables the non-account owning spouse to be named as a legal payee on a 401K account. This means that funds may be paid directly to that spouse per the QDRO and divorce agreement, bypassing the retirement account owner altogether. The use of a QDRO also prevents the assessment of early withdrawal fees. A former spouse who receives funds from the other partner’s 401K pursuant to a QDRO assumes responsibility for the income taxes when the disbursement is part of the couple’s property division agreement.
A QDRO may also be used to enable a person access to 401K funds to satisfy a child support or alimony award.
