For divorcing spouses in Texas, a qualified domestic relations order can help preserve retirement assets.
Every divorce in Texas is unique but there are some things that many modern divorces often share. The need to sell a family home, for example, is often faced by couples when they choose to end their marriages. For families with small children, wrestling with the details of who the kids will be with when is another part of divorces many people experience.
Another such thing is the need to split a retirement account in the process of allocating assets and debts to each spouse. But, before people rush into this and assume this is as simple as documenting the details in a divorce decree, more information should be gathered.
What is so special about splitting a 401K?
As The Balance explains, when it comes to taking money out of a 401K account for anything other than to fund retirement, a penalty may be assessed. This penalty most often amounts to 10 percent of the value removed from the account. In addition, the distribution may also be subject to income tax. Together the penalty and tax amounts can take a serious bite out of what a person was to receive in the first place.
How can the penalty and taxes be avoided?
According to the United States Department of Labor, in addition to stipulations in a divorce settlement, the use of a qualified domestic relations order is advised when splitting a 401K account in a divorce. The QDRO is a means of allowing the non-account owning spouse to be identified as an alternate payee on the account. This means money can be paid directly to that person so the account owner has no penalty or tax liability.
The QDRO also provides a legal means for the receiving spouse to avoid paying the penalty. As far as taxes are concerned, if the money is put into another retirement fund, those are also avoided when the payment is made.
Is a QDRO only for one-time payments?
A single qualified domestic relations order can provide instructions for a lump sum payment to a spouse or for a series of ongoing payments to that person. In addition to satisfying a property division agreement, a QDRO can allow an account owner to tap into the funds to pay spousal support.
Is a QDRO difficult to set up?
There are very specific requirements that must be satisfied in order for a QDRO to be approved and legally recognized. It is best for Texas residents to work with an experienced attorney to make sure all of the details of their QDRO are properly attended to.