What is a Qualified Domestic Relations Order?
When getting divorced, many couples can often benefit from the use of a Qualified Domestic Relations Order to help prevent additional taxes.
When getting divorced, it is common for Arkansas couples to be concerned about losing precious financial assets. These losses can be realized in spousal support or child support payments as well as the literal splitting of other assets. Retirement accounts are among some commonly divided assets in today’s divorce cases.
While there may not be a way to prevent a retirement account from being split in a property division settlement, there can be ways to minimize the loss. This comes primarily in the form of a Qualified Domestic Relations Order.
What is the QDRO?
Retirement account funds are held in one person’s name only. This person is generally the only one allowed to receive money from the account. A Qualified Domestic Relations Order , however, establishes an additional named payee on the account per the U.S. Department of Labor. It should be noted that a QDRO is only to be used for company-managed accounts like a 401(k) or 403(b).
In divorce situations, the Internal Revenue Service notes that a QDRO can be used to identify that retirement assets are legally allowed, and sometimes mandated, to be used to pay child support or alimony. A QDRO can also stipulate that one spouse is able to receive a distribution from the account pursuant to a property division agreement. If property division is the reason for the distribution, the spouse who receives the money may be liable for taxes unless he or she appropriately reinvests it.
What happens without a QDRO?
Retirement account monies are intended to be taken out only for retirement purposes. Forbes gave information about a man who withdrew nearly $50,000 from his 401(k) to satisfy an alimony award at the direction of a family law judge. Because no QDRO was utilized, he received a large tax bill amounting to 10 percent of what he withdrew.
The IRS did not recognize his withdrawal as pursuant to his divorce decree but rather as an unauthorized early withdrawal that did not meet retirement qualifications. If he had received proper guidance and created a QDRO, the tax assessment could have been avoided.
Legal knowledge is important
Like the creation and filing of any legal document, there are right and wrong ways to execute a QDRO. Incorrectly done, what should offer great protection may end up offering no protection at all.
People in Arkansas who are getting divorced should always consult with an experienced attorney to help them manage their assets and protect them through the process.