The QDRO and your 401(k)

On Behalf of | Dec 2, 2020 | Divorce

A 401(k) account ranks high as one of the assets people fear losing when they get divorced. Despite the name of only one spouse appearing on an account, the fact remains that these assets frequently fall into the category of marital assets. Therefore, many couples must split the value of the account during their divorces.

The use of a qualified domestic relations order when splitting a 401(k) account in a divorce offers many benefits to the account holder.

401(k) distribution options

Under normal or ideal circumstances, a person would not take any money out of a retirement account until after she or he retired. The distributions would then provide an income stream for a person who no longer works.

As explained by the U.S. Department of Labor, any distribution from a 401(k) account for reasons other than to provide income during retirement may contribute to a person’s required payment of early withdrawal fees.

Divorce decrees may not prevent early withdrawal fees

A person taking money from a 401(k) to pay a spouse per a divorce decree may assume the divorce documentation allows an exception to the early withdrawal fees. However, these fees may still apply without a qualified domestic relations order.

How a QDRO helps

According to the Internal Revenue Service, a QDRO names the other spouse as an authorized payee on a 401(k) account. That authorized payee may receive distributions directly per the QDRO without the assessment of any early withdrawal fees.

Responsibility for income taxes on any money received per a QDRO falls with the authorized payee, not the account owner.

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