During the divorce process, a couple will need to divide multiple different types of marital property. In addition to physical property, spouses will also need to address ownership of financial accounts and other complex assets, including retirement accounts or pensions. When dividing retirement assets, spouses should use a qualified domestic relations order, or QDRO. Understanding the purpose of these types of orders and the benefits they provide will ensure that spouses can protect their financial interests during the divorce process and in the years to come.
Dividing Funds in Retirement Accounts
For employer-sponsored retirement accounts such as 401Ks, a person will have a certain amount deducted from their income before paying taxes. The money saved, which will grow through investments made by the plan holder, will usually remain in an account until a person reaches retirement age, and they will pay taxes when the funds are withdrawn.
During their divorce, a couple may agree that some of the funds in a retirement account in one spouse’s name will be withdrawn and transferred to the other spouse. However, simply withdrawing the amount will result in penalties if the account holder has not yet reached retirement age, and taxes will apply to the withdrawal. To avoid this, the court may issue a QDRO that will specify the amount that should be withdrawn and transferred to the other spouse. When a QDRO is provided to the plan holder, penalties and taxes will not apply to withdrawals, and the other spouse can roll the funds over to their own account.
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