Why Does a QDRO Matter?
A Qualified Domestic Relations Order should be should be considered a must-have when splitting company-sponsored retirement accounts in a divorce.
When getting divorced in Florida, many unexpected scenarios can arise. Some of these situations are initiated by details about divorce legalities that the average person may be unaware of. Even when both spouses agree on how to split their marital assets, the execution of that agreement can bring about some unpleasant consequences if important steps are overlooked.
Retirement funds like 401(k) accounts are commonly split between spouses as part of the divorce settlement. Detailing this in the divorce decree is important but is not the only thing that must happen. The filing of a Qualified Domestic Relations Order is also required when moving money from one person’s retirement account to another person.
Why is a QDRO needed?
Under normal circumstances, when funds are withdrawn from a 401(k) at any time when the account holder does not meet retirement criteria, taxes will be due on the money. Paying these taxes is like letting go of a lot of money in one fell swoop.
Forbes explains that such tax bills could amount to 10 percent of the value of the money removed from an account. That is how much one husband had to pay when he failed to use a QDRO to make his divorce-related transaction. This happened despite the fact that a family court judge told him to pay his ex-wife with money from his retirement fund.
If the man in the above example had filed a Qualified Domestic Relations Order, he could have saved himself roughly $5,000 money that went ultimately to tax payments.
How does a QDRO avoid taxes?
Retirement accounts are held in only one person’s name and that person is the official payee, able to receive money from the fund. A QDRO creates a second payee that is therefore qualified to receive money from the fund for a specific purpose. As the name implies, this purpose is a domestic matter like divorce. The U.S. Department of Labor explains that it can actually outline details for alimony, property division and child support payments.
A Qualified Domestic Relations Order will give direction about how much money is to be given to a particular individual, on what dates and for what purpose. Payments received for child support or spousal support will be received free from any taxes for either the account holder or the recipient. In contrast, payments that are for property divisions settlements can still be subject to taxes unless the spouse that receives the money reinvests it per the Internal Revenue Service. This responsibility lies solely on the recipient and the account holder will have no tax liability once the QDRO has been filed.
Saving Retirement Money
There are many benefits to utilizing the proper legal processes when getting divorced. For this reason, Floridians are encouraged to always work with experienced family law attorneys when a marriage is ending.