For many people in Florida, a 401K may represent one of the biggest financial assets they own. When they get divorced, they may be faced with the prospect of losing some of these valuable savings as part of their property division settlement.
When taking money out of a 401K account for purposes other than to fund retirement, a person may also face the assessment of high early withdrawal fees that could further eat into their hard-earned savings. The use of a qualified domestic relations order may help them avoid these losses.
The qualified domestic relations order
As explained by the U.S. Department of Labor, a qualified domestic relations order allows a spouse to be named as an alternate payee on a 401K or other employer-sponsored retirement account.
The QDRO should outline all details of any payments to be made to the alternate payee and must be approved by the plan administrator. With the approved QDRO in place, money from the 401K account may be paid directly to the account owner’s spouse. By bypassing the account owner, they avoid early withdrawal penalties. The spouse, or alternate payee, also avoids these fees as the disbursement is pursuant to the approved qualified domestic relations order.
Taxes and the QDRO
Income taxes are generally paid on distributions from 401K accounts. For distributions per a qualified domestic relations order, the tax responsibility is assigned to the recipient, not the account owner. However, the Internal Revenue Service explains that income taxes may be deferred if the recipient reinvests the funds into another qualifying retirement account.