One of the primary tasks that you have to do when you go through a divorce is dividing property. This includes all assets and debts. For some, their retirement accounts are among the biggest assets. But most people realize that simply withdrawing money from the retirement account to give to the other party could result in taxes and penalties.
If you have a qualified retirement plan, such as a 401(k) or a pension, you can divide the account during the property division process using a qualified domestic relations order (QDRO). This allows part of the account to be reassigned to the non-account-holding spouse without any early withdrawal penalties.
QDROs must be handled properly
The QDRO is a court order that is handled by the plan administrator. A valid QDRO must clearly state the amount and percentage to be paid, who the plan applies to and the name of the alternate payee. If anything is incorrect or missing in the order, the plan administrator can send it back to the court for correction.
In order for a QDRO to apply, it has to meet federal requirements under the Employee Retirement Income Security Act. Only retirement accounts that are covered by this act can be handled via a QDRO. This means that it is not appropriate for individual retirement accounts because those aren’t qualified under that act.
The property division process during divorce can be complex, particularly when there are assets such as retirement accounts. Understanding the options and how each of these might be handled is critical to ensure that you make decisions that are in your best financial interests. It may be beneficial to work with someone who can help you go through these options.