If you are your spouse are getting divorced and believe that you may be splitting retirement assets as part of your property division settlement, you should learn about Qualified Domestic Relations Orders. Depending on what type of retirement accounts you have, a QDRO may be essential for you in helping you to avoid unnecessary taxes or penalties.
As Forbes explains, a QDRO legally establishes another party as eligible to receive distributions from a 401K account. Because these accounts are set up in only one person’s name, that person is the only authorized payee. In addition, that payee is only allowed to take money from the account upon meeting the stipulated retirement age. If you are under this age and choose to withdraw money from your 401K account, you may be subject to early-withdrawal penalties. This can happen even if you have a divorce decree stating that the account value is to be split between you and your spouse.
A Qualified Domestic Relations Order should be used in conjunction with your divorce agreement to outline any use of 401K funds related to your divorce. This may include a marital property division settlement, payment of child support, or payment of spousal support. The alternate payee may be your former spouse, child, or any other dependent.
With a QDRO, you are free from the tax liability for any distributions to your former spouse for asset division purposes. If your ex-spouse fails to reinvest the funds, he or she may be subject to taxation. Tax liability for payments pursuant to a child or spousal support order would remain yours. This information is not intended to provide legal advice but general information about the use of a QDRO in a Virginia divorce.