What Is a Qualified Domestic Relations Order?
When a couple goes through a divorce, one of the issues that need to be addressed in asset division. It is not uncommon that assets included in the marital estate are the retirement accounts that one or both spouses have. Unlike a regular bank account, however, where withdrawals and deposits can be made freely, retirement accounts usually have strict rules in how and when they can be accessed. Failure to follow these rules can result in hefty penalties and/or tax implications. Therefore, when retirement funds need to be divided as part of a divorce settlement, there are certain legal steps that will need to be taken.
A Qualified Domestic Relations Order or QDRO is a court order that allocates retirement funds between spouses and permits a spouse to receive payments directly from the retirement fund of the individual they are divorcing. QDROs are particularly important if only one spouse was saving for retirement during a marriage. A divorce attorney can explain the specifics of how this process works. In the meantime, the following is a brief overview.
What Are QDROs?
The Employee Retirement Income Security Act of 1974 or ERISA and the Internal Revenue Code of 1986 or IRC govern QDROs. These organizations do not allow an individual who is saving for retirement to designate their interest to another individual. A QDRO is an exception to this rule.
A QDRO creates an alternate payee, meaning a second individual may be entitled to receive some or all of the retirement participant’s proceeds. Since QDROs can be very complicated, hiring a divorce lawyer is essential.
Complications of QDROs
One of the main reasons QDROs are so complicated is that each retirement plan is different. Some plans send monthly payments to the owner of the account once they retire, while other plans will make a lump sum payment to the plan owner. QDROs are not valid unless they are drafted in a way that aligns with the term of a 401K, profit sharing, pension, or other retirement plans.
It is also important to note that a QDRO cannot order a retirement plan to pay an ex-spouse sooner than or more than the plan would pay the participant. Therefore, devising a QDRO takes a lawyer who is well-versed in QDROs and the various types of retirement plans available.
How Long Do QDROs Take?
The length of time it takes for the QDRO process to complete can be anywhere from three to six months, as long as there are no issues that arise. It involves both spouses, their attorneys, the judge, the retirement plan administrator, and the attorney for the QDRO. Since the process often takes longer than expected due to its complexity and the multiple parties involved, neither spouse should depend on receiving the funds quickly.
What Are the Tax Implications of QDROs?
Just like all retirement plan distributions, payments to an ex-spouse from a QDRO are taxable once they are received. All amounts taken will be subject to an automatic 20 percent federal tax withholding.
Contact an Experienced Divorce Lawyer
If you are considering divorce and have questions about how the process will work in your situation, reach out to divorce lawyers. They will inform you of your legal options and ensure your rights are protected.
Posted on May 25, 2019 @ 5:10 am