Retirement savings, like 401K accounts, may often be one of the many assets reviewed in the context of a property division settlement. However, the manner in which one person receives a share of his or her former spouse’s account may make a big difference in how much either spouse receives or keeps.
Unlike other assets, when one spouse simply pays the other spouse, some of the saved money may be lost to penalty payments, reducing the amount both people end up with.
The case for the qualified domestic relations order
The United States Department of Labor indicates that a qualified domestic relations order allows the owner of a 401K account to name another person as an authorized payee on the account. The authorized payee may be a current or former spouse, a child or another dependent.
Once the QDRO receives the required approval by the retirement plan administrator, the authorized payee may receive payments directly from the account. The QDRO must outline all terms of any payment or payments required. Per a property division award, the authorized payee may receive a percent or a fixed amount of the account owner’s 401K.
Penalties without a QDRO in effect
Without a QDRO, an account owner may withdraw money from a 401K and give that money to a former spouse per the couple’s divorce decree. If the account owner does not meet retirement criteria, he or she may need to pay high early withdrawal penalties, reducing the total value of the fund.
Taxes on distributions
Distributions from 401K accounts may result in tax assessments, payable by the authorized payee named in the QDRO. The Internal Revenue Services notes, however, that putting the money into another retirement account may avoid taxes at the time of receipt.