When a couple decides to end their marriage, assets accumulated during the marriage must (generally) be fairly divided between the spouses unless spouses agree to an unequal division of their property, for whatever reason. Marital assets often include retirement funds that have been saved for the couple’s future.
A Qualified Domestic Relations Order (QDRO) is a legal document used in divorce agreements. This document highlights who is entitled to receive a portion of an account owner’s retirement plan assets.
The significance of QDROs in property division
Retirement accounts are usually among the most valuable assets in a marriage. Without a QDRO in place, the division of these accounts could result in substantial tax implications and penalties for both parties involved.
A QDRO may be essential because it enables a retirement plan administrator to share the retirement funds between the divorcing spouses without compelling them to incur early withdrawal penalties or tax liabilities. This legal order establishes each spouse’s right to a portion of the retirement account. This helps ensure that the division adheres to the guidelines established by the Employee Retirement Income Security Act (ERISA).
The process of obtaining a QDRO
First, the divorce agreement must clearly state how the retirement accounts will be divided. It is essential to seek legal counsel to help ensure the QDRO is properly drafted and approved by the court.
The QDRO must be specific and should include important details, such as:
- The names and addresses of the plan participant
- Alternate payee (the former spouse who will receive a share of the retirement benefits)
- The specific percentage or amount that each party is entitled to receive
Once the QDRO is prepared, it must be submitted to a retirement plan administrator for review and approval. The plan administrator will try to ensure that the QDRO meets the requirements and provisions of the retirement plan before it is implemented.
Tax implications of QDROs
Both parties should understand the potential tax implications of QDROs. When retirement funds are transferred from one spouse to another through a QDRO, the recipient spouse may still be liable for income taxes upon withdrawal.
To avoid immediate tax consequences, the recipient spouse may opt to roll over the funds into an Individual Retirement Account (IRA). This allows the funds to continue growing tax-deferred until the recipient chooses to make withdrawals in the future.
These plans can help to ensure a fair distribution of marital assets but they’re not always straightforward, so it’s generally a good idea for couples to seek legal guidance before committing to this course of action.
