Understanding the qualified domestic relations order
A qualified domestic relations order may allow retirement funds to be used to pay child support, spousal support or property division awards.
The impact of a divorce can be far-reaching for Texas residents. While emotions may take some time to heal, a spouse who is required to pay child support, spousal support or large sums as part of a property division settlement may face a difficult financial future as well.
When concerned about how to satisfy these requirements, Texas spouses should know that they may be able to tap into their 401K accounts for help. Before doing this however, it may be important to use a qualified domestic relations order.
What is a qualified domestic relations order?
As explained by the U.S. Department of Labor, a QDRO is a type of legal order that allows a person other than the plan owner to receive money from a particular type of retirement account, including a 401K. The other person is referred to as an alternate payee and may be a child, other dependent, spouse or ex-spouse.
A QDRO may be established in conjunction with a divorce decree as the divorce then becomes the qualifying domestic situation warranting the order. According to Mass Mutual, a domestic relations order is different than a qualified domestic relations order. The former is governed by state law and the latter by federal law. The Internal Revenue Service tax code outlines stipulations for the QDRO.
What about taxes or early withdrawal penalties?
Typically, when a person takes money out of a retirement account for purposes other than retirement, taxes and even penalties may apply. The Internal Revenue Service indicates that a QDRO may protect against this.
If a spouse or former spouse is the alternate payee, that person assumes tax responsibilities for any distributions made per the order. If the received funds are put into a different but qualifying retirement account, it may be possible to avoid the assessment of taxes or penalties at that point.
When a QDRO is used to outline the use of retirement funds to make payments to a child or dependent, the plan owner remains responsible for any taxes on the distributions.
Should I use retirement fund for domestic awards?
Tapping into retirement funds should never be done without first carefully assessing the bigger picture. NerdWallet notes that if a 401K is considered a dividable asset in a divorce, spouses should consider the long-term implications of keeping or receiving any or all of the funds and compare it to other assets. It may well be in some situations that opting for a different asset division plan is preferable.
This is just one of the reasons that working with an attorney is important for people getting divorced in Texas. Getting the right help may prevent making decisions that ultimately may not be in one’s best interests.