If you and your spouse have decided to end your marriage, you probably want the property division phase of the upcoming divorce to move along as smoothly as possible.
Among the assets destined for division are retirement plans of various kinds that employ the use of a QDRO to split the funds.
The Internal Revenue Service sees a Qualified Domestic Relations Order, or QDRO, as a court decree or order for paying retirement plan funds to the spouse, former spouse or other dependent of a plan participant. If you receive such funds as the former spouse, you can roll the payments into your own retirement fund, such as an IRA. Keep in mind that you must report any QDRO benefits you receive from your ex-spouse’s retirement plan. Also, the QDRO only applies to plans covered under the Employee Retirement Income Security Act, or ERISA.
The defined contribution plan
A 401(k) is a good example of a defined contribution plan. This kind of account maintains a daily balance and division can proceed through a QDRO. If you receive payment from a 401(k) as the former spouse of the plan participant, you can avoid tax consequences by rolling the funds into your IRA, although you are not required to do so. You can expect to pay income tax on any funds you choose to spend.
The defined benefit plan
A plan administrator can approve the use of a QDRO to divide a defined benefit plan, such as a pension plan. There are three standard methods of dividing pension assets:
- Cash-out method for a lump sum settlement
- Deferred division, through which both you and your ex-spouse share any benefits paid out
- Reserved jurisdiction where the court can order distributions at some future point
The team approach
You may find the various aspects of dividing retirement accounts complicated, especially if you and your soon-to-be-ex are facing a high-net-worth divorce. It may be advisable to add tax and financial advisors to the team of professionals handling your divorce.