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The importance of a QDRO

On Behalf of | Jul 29, 2018 | High Asset Divorce

When getting divorced, one of the things that many people in New Jersey can find difficult to accept is the fact that they may have to split their 401K assets with their to-be former spouse. Especially for people who have saved for decades and for whom retirement may be near, this can feel like a major financial setback. While splitting the retirement funds may be unavoidable, there is one thing that can help them to avoid additional losses. That is the use of a qualified domestic relations order.

As explained by the United States Department of Labor, in most situations when a person withdraws money from a 401K or other employer-sponsored retirement account for reasons other than retirement, they may be subject to high taxes and early withdrawal fees. These assessments reduce the amount of money they get in the end. During a divorce, if one spouse is ordered to give the other person a percent of their 401K, that account holder could be in the same situation if they simply take a distribution and then hand it over to their ex. 

The use of a qualified domestic relations order can avoid all of this. The QDRO establishes the non-account owning spouse as a legal alternate payee on the account so the money owed to that spouse can be distributed directly to them and never goes through the account owner at all. The recipient is then responsible for any taxes on the funds.

The Internal Revenue Service adds that if the recipient spouse reinvests the money into a qualifying retirement account, they may be able to avoid taxation at the time.