People preparing for divorce often have different priorities depending on their circumstances. For most spouses, exiting the marriage with a fair and reasonable share of assets is a priority. They may seek to increase what they retain by limiting divorce expenses and ensuring they receive optimal value for any liquidated marital assets.
Preserving resources that could decline in value during divorce is also an important consideration. Spouses frequently save during marriage for retirement. Each spouse could have a 401(k) associated with their job. Either spouse might have a pension.
In such cases, drafting a qualified domestic relations order (QDRO) could be an important part of the divorce process. People who understand what a QDRO does may recognize how beneficial they can be during divorce.
People can split accounts without penalties
Some couples can reach settlements that allow for the fair division of the marital estate without actually splitting their retirement savings.
401(k)s and similar tax-deferred retirement accounts usually have rules limiting early withdrawals. Even if the account holder has an emergency, such as medical bills they need to pay, withdrawing funds from a tax-deferred retirement account leads to a financial penalty.
They usually lose an additional 10% beyond the amount they withdraw before reaching retirement age. They also have to report the funds they withdraw as income, which can significantly increase their income tax obligations for the year. A QDRO helps bypass both of those issues.
An attorney drafts the QDRO based on the terms of the property division order. Both spouses sign the document. It then goes to the courts for approval before submission to the professional who manages the pension or retirement account.
A QDRO allows a professional to move a specific percentage of the original account balance into a new account in the other spouse’s name. So long as neither spouse withdraws funds from their individual accounts, they don’t have to worry about taxes or penalties.
Creating and recording a QDRO can be an important part of optimizing asset retention during property division proceedings. If the actual division of a retirement account or pension is necessary, then a QDRO can help maximize the amount each spouse receives.