Understanding the QDRO in a divorce

A Qualified Domestic Relations Order is a very important document for divorcing spouses who must split retirement accounts.

For couples in and around Las Vegas Valley, Nevada , who are in the throes of a divorce, learning how to minimize their financial losses is important. A certain amount of financial loss may be unavoidable but fortunately there are ways to prevent some such loss of assets. One of the ways to do this is by using a Qualified Domestic Relations Order when certain retirement accounts are split pursuant to a property division settlement.

What a Qualified Domestic Relations Order does

In most cases, funds may only be taken out of a retirement account penalty-free once the named account owner reaches retirement age. Money can be withdrawn from a 401(k) or other type of retirement fund at other times but doing this will generally result in the assessment of early withdrawal penalties and additional taxes. This essentially wastes a large percentage of a person's savings and it can even happen when a fund is split in a divorce.

One exception does exist to this and that is when the Qualified Domestic Relations Order is used. According to the U.S. Department of Labor, a QDRO works by first establishing the non-account holding spouse as a named payee on the retirement account. Then, when a divorce decree outlines the parameters by which the funds are to be distributed, they can be done so to either party.

The Internal Revenue Service explains that a QDRO may be used to identify how a retirement account balance will be used to pay a property division settlement. It can also be used when the funds are to be used to provide spousal support or child support. When the money is received as part of a property division agreement, the receiving spouse holds responsibility for any taxes.

What can happen without a QDRO?

Forbes gives an account of what can happen to people who choose to rely on divorce decrees alone when allocating retirement monies to a former spouse. One man, following the order of a judge in a family court, took approximately $50,000 out of his retirement savings. He paid that money to his former wife. Eventually, he was forced to pay 10 percent of the value of the money he withdrew in taxes because no QDRO was used.

Getting the facts

A Qualified Domestic Relations Order is one more type of legal document and therefore comes with specific requirements for its creation and filing. Any deviation from the guidelines can result in problems for divorcing spouses in Nevada. A consultation with a divorce attorney is always recommended when these situations arise.