Among the many precious assets that a married couple may need to split up when they get divorced is a retirement account.
When sharing one person’s employer-sponsored account, such as a 401(k) account, the use of a qualified domestic relations order may help both spouses and preserve some of their hard-earned savings.
What a QDRO does
At its most basic level, a qualified domestic relations order allows distributions from the 401(k) account to be made to the account owner’s spouse. The United States Department of Labor indicates this happens by naming the spouse as an authorized payee on the account. The QDRO must stipulate all details of payments to be made to the authorized payee, including if they will receive a single or multiple payments.
Why the authorized payee matters
Without a QDRO, a person who needs to share his or her 401(k) account assets with a spouse per a divorce decree would have to make a withdrawal from the account and then give the money to the former spouse. This withdrawal would not meet the requirements for 401(k) retirement distributions and therefore be subject to early withdrawal penalties.
These early withdrawal penalties significantly reduce the amount of money left in the 401(k) for the account owner and the spouse.
Income taxes and the QDRO
The Internal Revenue Service explains that a person must pay income tax on money withdrawn from a 401(k) account. With a QDRO in place, the authorized payee assumes this responsibility. Taxes may be deferred, however, by reinvesting the money into a different retirement account.
