QDRO benefits for divorcing spouses

California residents who need to split 401K accounts in a divorce should learn about the qualified domestic relations order.

Among the many challenges of getting divorced for California residents is the potential loss of hard-earned and long-saved retirement assets. It is not uncommon for couples to split these assets as part of their property division settlements. However, just because this is common does not mean that there are not some very specific ways this should be done.

Great care is required else spouses may see large sums of their savings lost to early withdrawal penalties and high taxes. A qualified domestic relations order may help to prevent these additional losses.

Why do I need a QDRO?

Typically, distributions from a 401K are only allowed when the account owner meets retirement criteria such as being a certain age. Any distributions outside of this may be subject to high penalties and taxes.

The Internal Revenue Service explains that a qualified domestic relations order essentially complements a divorce decree and legally establishes the non-account owning spouse as eligible to receive distributions from the 401K pursuant to the divorce decree.

Per The Balance, not every type of retirement fund requires the use of a QDRO when splitting assets in a divorce. However, any account governed by the Employee Retirement Income Security Act of 1974 will need a QDRO.

How does the QDRO prevent taxes and penalties?

When the QDRO is in effect, the account owner is not liable for early withdrawal penalties or taxes. The spouse receiving money from the account may be responsible for taxes. However, if that spouse puts the money into another qualifying retirement fund, the taxes may be able to be avoided.

If an account owning spouse takes a distribution from their 401K to satisfy a property division agreement but does not have a QDRO in place, they may be on the hook for the taxes and fees even if the divorce decree outlines the split.

Can a QDRO be used for anything else?

The U.S. Department of Labor explains that a QDRO can be used to allow a person to access 401K funds to satisfy spousal or child support awards. For these purposes, distributions may be one-time or ongoing in installments.

As with property division settlements, the person receiving the alimony would assume any tax liability. However, when funds are used to make child support payments, the account owner retains responsibility for any taxes.

How can I learn more about the QDRO?

As soon as a divorce becomes a possibility, California spouses should reach out to an experienced family law attorney. This is the best way to learn the many nuances involved in dividing assets and debts and to best protect one's interests.