Texas residents who get divorced and have to split retirement accounts should understand when to use a QDRO.
For couples in Houston, Texas, who have made the difficult decision to end their marriages, many losses can be experienced. These losses can be emotional and physical as well as financial. While some losses in a divorce are unavoidable, others can be prevented. One example is the loss that can come in the form of taxes and penalties when retirement account monies are not properly handled.
Retirement accounts are commonly split as part of a property division settlement. In other situations, one spouse may utilize these funds in order to make child support or alimony payments. What documentation is utilized for these transactions can make the difference between some of the funds being lost to early withdrawal penalties and taxes or not.
The Qualified Domestic Relations Order
In most cases, money is only allowed to be withdrawn from a 401(k) or other company-managed retirement account without penalties when the account holder meets retirement criteria. When the account holder does not mean these criteria yet still opts to take a distribution from such a fund, they can expect to lose some amount of their savings to taxes and penalties.
An exception to this rule comes into play when a Qualified Domestic Relations Order is utilized. The U.S. Department of Labor explains that a QDRO sets up another person as a qualified payee on an account. It can then legally authorize distributions to that person based upon certain domestic events, like a divorce.
According to the Internal Revenue Service, a QDRO can stipulate that 401(k) assets are able to be used or even required to be used to satisfy a spousal support or child support award. It can also stipulate that one spouse should receive a certain amount from the fund pursuant to a property division decision. In this latter instance, the spouse who receives the money can be subject to taxes unless the funds are reinvested properly.
The problem of not using a QDRO
Forbes provides a real-life example that illustrates the dangers associated with not using a QDRO. At the order of a family court judge, a spouse withdrew roughly $50,000 from a retirement account. The money was given to the other spouse as an alimony payment. Despite the existence of a judge’s order, the lack of a QDRO resulted in a 10 percent tax assessment on the withdrawn amount.
Legal processes and knowledge matter