Most divorcing couples understand that their property must be divided in a certain manner, depending on whether they live in a community property or equitable distribution state. There is one often-overlooked asset, however, that follows federal law when it comes to divorce property laws. The money contained in certain types of retirement accounts, such as a 401(K), is considered marital property, regardless of who's name is on the account or made the income that funded it.
To ensure that you don't miss out on the opportunity to take advantage of this valuable financial asset when divorcing, read on.
Qualified Domestic Relations Order: While the name is a bit confusing, the QDRO is actually a mandate that allows the spouse who does not own the specified retirement account to take funds from it as a result of the divorce. If your spouse has been contributing to a retirement fund, some (or all) of the funds may be distributed to you, free of penalties for early withdrawal. The amount you can get depends on your divorce agreement, but you are entitled to some of the money no matter who owns the account.
Executing the Order: This order pertains to your divorce decree, but should be considered a separate issue. In fact, the QDRO usually must be approved by the judge before the divorce decree, since the property division may hinge on it. For example, a spouse may trade funds in a retirement account under a QDRO for getting the vacation home, or other assets. These details need to be ironed out and agreed upon before the QDRO is complete, but before the final decree is handed down, so timing is crucial.
Using the Funds: If you are the recipient of QDRO related funds, you should understand that only the penalties for early withdrawal are waived, not the tax obligation. These funds are meant to provide the receiving spouse with the opportunity to add to their own retirement account or to begin one. Usually, you must "roll over" the funds into a qualified account within a certain period of time to avoid having those funds taxed as income.
Fund Administration: Retirement funds and the manner they address a QDRO differ widely; some give out lump sum payments and some distribute regular payments. Your divorce attorney will need to work closely with the fund administrator on the exact manner of not just the distribution but other details. Begin the QDRO process early on in the proceedings to ensure that it's complete by your final decree.
To learn more about the process, contact local firms like Bergermann Law Firm.