People who are going through a divorce may have considerable assets to divide. Some of these are retirement accounts. Unlike many other assets, dividing retirement accounts has some very important considerations.
If the couple has separate retirement accounts that are worth approximately the same, they may each keep their own account. When there’s only one account or if the available accounts aren’t roughly equal, a division of those may occur. For qualified retirement accounts, such as 401(k) or 403(b) accounts, a qualified domestic relations order (QDRO) is necessary.
What does a QDRO do?
A QDRO tells the plan administrator that a transfer of funds from the retirement account is required. It names the person who will receive the transfer and their contact details. It also includes the division method. This can be either a dollar amount or a percentage, depending on the circumstances.
The plan administrator has to review the terms of the QDRO to determine if they’re allowable under the plan. If there are any issues with the terms, the plan administrator will return it for correction.
The initiation of a QDRO is a tax-saving strategy for some people going through a divorce. The catch is that the funds must be transferred to a retirement account. If the person is under the set retirement age and doesn’t transfer the funds to a retirement account, they’ll have to pay taxes on the transferred amount.
A QDRO is only one part of the property division that people going through a divorce must think about. It may behoove them to seek assistance to determine how to handle this aspect of ending their marriage.