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QDROs and 401K division

When a married couple gets divorced, they know they will have to figure out how to split up their shared assets. For many people, a retirement account may well be their most significant financial asset. This makes it very important for the couple to decide who will keep or receive what portion of this valuable savings. For people who get divorced when they are nearing retirement, this can be even more essential.

One fact regarding retirement accounts is that any withdrawal of funds from them must meet qualifying retirement eligibility rules. If the withdrawal does not mean these rules, then the person who receives the money may have to pay very high early withdrawal fees and income taxes on the money received. This, in essence, may dramatically reduce the amount of money they can get.

When a 401K account is to be split between divorcing spouses, the United States Department of Labor indicates that the use of a qualified domestic relations order allows a plan holder’s spouse to be named as a legal payee on the account. The QDRO also allows that spouse to receive funds from the 401K account even if they do not meet retirement eligibility without paying any penalties.

According to the Internal Revenue Service, the spouse who receives the funds from their former partner’s retirement account as part of a property division award will be responsible for the income taxes on the money. If that person chooses to invest the money into another retirement account, the need to pay taxes may be deferred until the money is withdrawn from that account.