Why do I need a QDRO?
Married couples in Texas may find postnuptial agreements beneficial for them in many different situations.
Splitting marital assets and debts during a divorce can come with many challenges – often some that Alaska residents are completely unaware of at first. While retirement accounts are held in one spouse’s name only, they may still be considered marital assets and therefore may be subject to division between spouses during a divorce.
When it comes to splitting a 401K account in a property division settlement, there may well be a right way and a wrong way. The right way involves the use of a qualified domestic relations order.
The alternate payee
The U.S. Department of Labor explains that only a named account holder is generally able to receive distributions from an ERISA retirement plan. One exception to that is when a QDRO is in place.
The QDRO establishes another party as eligible to receive distributions from an account held in someone else’s name. This person is referred to as an alternate payee. The alternate payee may be the spouse, child or dependent of the person who owns the plan.
Types of distributions allowed by a QDRO
The point of the QDRO is to allow the 401K funds to be used to satisfy either property division agreements between spouses. The qualified domestic relations order may also allow the funds to be used for child support or spousal support payments pursuant to the divorce decree.
Money may be distributed in lump sums or over time in periodic payments. Details of these payments must be identified in the QDRO.
Divorce decree not sufficient
While a divorce decree may stipulate the agreements made between spouses regarding asset division, child support and spousal support, the Alaska Court System indicates that a QDRO is still required. Furthermore, the creation of the QDRO is not the responsibility of the judge but of the parties involved in the divorce.
The problem of not having a QDRO
Typically when a person removes money from a 401K account for purposes other than retirement, penalties and taxes may be incurred. Together these can eat up a sizeable portion of the amount received.
According to the Internal Revenue Service, the presence of a qualified domestic relations order may prevent this from happening. A person who receives money from a former spouse’s 401K as a property division award may avoid the taxes and penalties by reinvesting the funds into another qualifying retirement account.
Proper attention to detail is required
Establishing a binding QDRO requires that proper procedure be followed. For example, a retirement plan administrator must approve the QDRO. Alaska spouses in need of QDRO protections should always consult with an attorney to ensure that no important steps are skipped.