QDROs and divorce decrees

On behalf of Stange Law Firm, PC posted in divorce on Tuesday, January 23, 2018.

Divorcing spouses in Missouri can find many elements of getting divorced difficult to accept, including the financial blow that can accompany a divorce. Losing significant assets is never easy but when it comes time to split a 401K or another type of retirement plan sponsored by an employer, there may well be a way for people to minimize what they have to let go of.

It is often believed that a divorce decree is the one document in which the parameters of any property division are to be spelled out. While certainly all agreements should be documented here, when it comes to splitting 401K accounts, the United States Department of Labor explains that a qualified domestic relations order will also be needed. The QDRO allows a retirement plan to make payments to a person other than the owner of the account.

Without a QDRO, a plan does not have to follow any of the parameters regarding a 401K that have been set out in a divorce decree. For the plan owner, this can be a vital means of protecting what money remains in the account as they would not be subject to any early withdrawal penalty for taking a distribution prior to reaching retirement age.

In addition, the plan owner would be able to avoid paying income tax on the money provided to the former spouse. According to the Internal Revenue Service, the spouse who receives the distribution from the retirement account per the QDRO may also be able to avoid taxation by reinvesting the funds into another retirement account.

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