The importance of a QRDO

For many people, an employer-sponsored 401K represents either their complete retirement savings or a large portion thereof. When a married couple faces a divorce, these assets may be subject to being divided between the spouses. If a retirement account is not split, it may still impact the outcome of the couple’s overall property division agreement where one spouse retains their 401K in exchange for the other spouse receiving another type of asset. If the spouses decide to split the account, the right steps must be taken to avoid incurring unnecessary penalties.

As explained by SmartAsset, the division of a 401K plan requires the use of a special order that not all retirement funds would need. An Individual Retirement Account, for example, requires the use of a transfer incident to divorce. When dividing a 401K, however, couples should utilize a qualified domestic relations order.

A QDRO is a legal order signed by a judge that allows a retirement plan holder to access plan funds for a qualifying domestic payment, generally related to a divorce. The QDRO would stipulate the transfer of either a set amount or set percent of the fund to the future former spouse with no early withdrawal penalties assessed on the account holder. The recipient may also avoid penalties by rolling over the money into another qualifying account.

According to the Internal Revenue Service, a QDRO may be used to facilitate the use of 401K funds to satisfy a property division settlement, but also to make spousal support payments or child support payments. When used for child support payments, the taxation responsibility remains with the account holding spouse.