When you and your spouse have agreed to get divorced, you know that soon you will face many decisions including those about dividing marital property. Among the assets that you and your spouse may end up sharing are retirement accounts. If these accounts are 401(k)s or other company retirement plans, the use of a Qualified Domestic Relations Order will be important for you.
Receiving money from retirement accounts is not quite as easy as receiving money from bank accounts or other investments. There are very strict rules about who can receive distributions and when that can happen. These generally center around the account holder’s age relative to retirement. When money is to be taken from a 401(k) for purposes other than retirement, high taxes and even early-withdrawal penalties can be assessed. A Qualified Domestic Relations Order bypasses all of this as noted by Forbes.
When you file a QDRO, you establish a secondary person able to receive money from the account. This can be done in a lump sum or in smaller payments over time. Either one can satisfy a property division settlement. Using a QDRO does not eliminate all tax implications, however. Unless properly reinvested, the distribution will be taxed to the recipient.
A QDRO can also outline payments to a former spouse for child support or alimony. In these cases, the tax liability would remain with the original plan holder. This information is not intended to provide legal advice but general information on about what a QDRO is and how it can help divorcing people in Illinois.