When should I use a QDRO?

A QDRO can allow people to tap into 401K funds to satisfy spousal support and child support awards as well as property division settlements.

Divorcing spouses in Tennessee generally encounter many questions through the process of getting divorced that they might never have thought about. These questions arise when unfamiliar circumstances are presented to them that they need to figure out. The financial aspect of a divorce cannot be understated and therefore many of these questions center around money in some way.

Splitting a retirement account with a QDRO

One concern many people have is how they can preserve as much of their retirement savings as possible. This is a valid issue as many spouses must split a retirement account as part of their property division settlement.

Typically, if money is withdrawn from a 401K account before the account owner meets retirement criteria, the person may be forced to pay early withdrawal fees. This is on top of income tax on any money received. If spouses agree to split an account and the owner simply takes a distribution and gives part of it to their former spouse, they could end up in this situation and see more loss than they need to.

As the United States Department of Labor explains, a qualified domestic relations order allows money to be paid directly to the former spouse. This can happen upon execution of the QDRO that is approved by the court for specific domestic events like a divorce. This means the account owner is not responsible for any early withdrawal penalties nor any income tax.

According to the Internal Revenue Service, if the spouse who receives the money reinvests it into a new retirement account, the income tax may also be avoided. This person does not have to pay the penalties either as the distribution was per the QDRO instructions.

Paying spousal support or child support

In addition to allowing people to split the proceeds of a 401K account, a qualified domestic relations order may allow the account owner to use the funds in the account to satisfy orders for alimony or for child support.

For spousal support awards, the alternate payee is the former spouse, as in a property division award. In this situation, however, the money received by that ex-spouse may be taxable as spousal support typically would be.

For child support awards, the alternate payee may be the dependent directly or a legal guardian. In either case, the account owner would be liable for any income tax as would be the case for any child support payment.

Proper guidance is important

There are many nuances involved in setting up a QDRO properly. These include filing documentation in specific timeframes and ensuring sufficient time for the 401K plan administrator to approve the order for starters.

For this reason, it is advised that Tennessee residents seek the input of an experienced family law attorney when in need of a qualified domestic relations order.