One of the reasons people place retirement funds into qualified retirement plans such as an IRA account is that the funds are set aside pre tax. When you’re going through a divorce, these retirement assets will need to be divided, and you’ll want to make sure that a QDRO is included in the agreement to handle these previously untaxed assets. If you divide a retirement account such as an IRA without a qualified domestic relations order, it can be subject now to taxes and even penalties.
A qualified retirement plan is a plan that is deemed eligible for tax benefits by the Internal Revenue Code. Types of qualified retirement plans include 401 (k) plans, IRAs, profit-sharing plans, and money-purchase pension plans. When money is taken from an employee’s paycheck and placed into the 401 (k), it is done before any taxes are taken out of the income, giving that employee extra value. The thing is, if money is withdrawn from a qualified plan before the time allowed by the Internal Revenue Code, a penalty is paid.
Because of this penalty, you don’t just want to take money out of the qualified retirement plan when splitting that asset. Instead, make sure that a QDRO is included in your divorce agreement. A QDRO (Qualified Domestic Relations Order) allows you to then roll the money over into another qualified plan, such as an IRA. So let’s say your spouse has a 401 (k). With a QDRO, you can then roll your agreed upon portion of the 401 (k) over into an IRA without paying taxes or penalties. A QDRO can also ensure that one person isn’t liable for all the taxes paid on a qualified retirement plan when the plan matures and money is withdrawn.
Not all divorce attorneys are familiar with preparing QDROs, so it is strongly encouraged that you select an attorney who can properly prepare this portion of your divorce agreement and make sure that your assets are properly protected. You can also consult with your Certified Divorce Financial Analyst to learn more about QDROs and how vital it can be to helping secure your retirement future.
For more, see our Certified Divorce Financial Analyst Services