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What can a QDRO do for me?

When getting divorced in New Jersey, the use of a Qualified Domestic Relations Order may guard against financial penalties.

Divorcing spouses in New Jersey understand the far-reaching nature of this life event. Getting a divorce literally touches all aspects of a person's life. Many losses can be experienced, some of which cannot be avoided. Fortunately, there is a way to avoid some potential financial loss by using the right processes and documentation. This involves the use of a Qualified Domestic Relations Order when money from a 401(K) account is needed to satisfy certain domestic obligations.

A review of retirement plan logistics

Whether a pension or a 401(K) or some other type of account, retirement funds are set up with a single owner, even when the named account owner has a spouse. This owner is the only person who can legally receive money from the account. In most cases, the account owner must meet retirement criteria in order to receive money without paying penalties.

As part of a divorce, a retirement fund may need to be split to satisfy a property division award. A Qualified Domestic Relations Order can allow this to happen without the account owner being required to pay penalties or taxes on any amount taken out for this purpose.

According to the Internal Revenue Service, a QDRO can also be used to allocate retirement funds to the payment of spousal support or child support awards. It is important to note that a QDRO is not required or applicable to every type of retirement account.

How the QDRO works

The U.S. Department of Labor explains that a Qualified Domestic Relations Order establishes an alternate payee on a specific retirement account. It works in tandem with a divorce decree to outline another person to receive funds pursuant to the decree stipulations.

The alternate payee can only be a spouse, former spouse, child or another legal dependent. It is to be used for making child support payments, alimony payments or toward an asset division agreement.

The pitfall of not using a QDRO

Without a QDRO in place, account owners can be subject to taxes on any money withdrawn from their funds. Forbes provides an example in which a husband followed the instructions of a family court judge and used money from his 401(K) to pay his ex-wife spousal support. No QDRO was used.

A tax court judge later approved a tax assessment amounting to 10 percent of the total that was taken from the account. The taxes had to be paid by the husband who owned the account. These taxes could have been avoided if a QDRO was used.

Complex situations require proper guidance

Forbes also explains that special care must be taken when leveraging a QDRO. For example, it is best to obtain approval from a retirement plan administrator before finalizing a divorce decree. This prevents a situation in which a decree states one thing but the orders relating to the retirement fund were denied.

The plan administrator has the final say in how the funds can be used. Nuances like this are just one reason that divorcing spouses in New Jersey should always work with an attorney.