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QDRO: minimizing tax hits on retirement fund splits in divorce

Ask a person in Texas under the age of 40 about their pension plans and you might get a quizzical look. Pensions are something their parents or grandparents have. For those in younger generations, retirement planning usually means socking something away in an Individual Retirement Account or a 401(k).

Because such plans are meant for retirement, bones of contention if a couple divorces. Some or all of the assets in the savings accounts are bound to be subject to division between the ex-spouses. But if the distribution isn’t handled the right way, it could mean someone suffers a loss. Taxes and penalties for early withdrawal could apply. For the sake of asset protection, a Qualified Domestic Relations Order is going to be required.

A QDRO is a legal document that makes clear that a person other than the one who holds the account is qualified to receive funds. In the event of a divorce, a QDRO represents a court’s order authorizing distributions from retirement accounts without IRS penalty. The funds could be used for spousal or child support payments. Alternatively, it could designate that a spouse is to receive a portion of an account’s balance as part of property division.

This suggests that many legal issues can intersect where retirement funds are concerned. Having a solid team of individuals with skill across the range of legal areas is clearly a plus in finding resolution. In some cases, it can be useful to deepen the bench by adding specialists from other professions. For example, to be sure that QDRO settlements are structured to best avoid undue taxes, a certified public accountant might be called in.

Once the right numbers are in the right place on the QDRO, an attorney can then make sure that the rest of the language is in order and that it is properly filed with the courts.