Qualified domestic relations orders may help divorcing spouses in Pennsylvania avoid losing more of their valued retirement savings than they need to.
People getting divorced in Pennsylvania understandably become overwhelmed by the forms and processes involved in ending their marriages. Simply having one person move out of a home is not all that is entailed.
For many couples today, 401K accounts, IRA’s and other “qualified accounts” represent significant assets and are therefore often part of a property division settlement. However, despite this being a relatively common thing, transfer or assigning all or portions of these accounts must be done with proper care to avoid triggering taxes and penalties that are really not necessary.
Payments to non-account owners
Because 401K, IRA and other “qualified” accounts are in one person’s name, this is generally the only person legally entitled to direct the disposition of these accounts.
As explained by the U.S. Department of Labor, if an account owner withdraws money from a retirement fund and does not meet the retirement qualifications, they may need to pay early withdrawal penalties as well as income tax on the distribution. This may apply even if the distribution is made pursuant to a divorce decree and the money is to be given to a former spouse per that decree.
A QDRO is a way of legally establishing the non-account owner as a payee of the fund. The spouse who receives the account may be able to avoid tax liability by reinvesting the money into another retirement account.
This may be done for two reasons. The first and most common is to satisfy a property division settlement. However, if an account owner is ordered to make spousal support payments and has no other way of doing so, they may use a QDRO to set up such payments from their 401K account to the other spouse. Again taxation responsibility falls on the recipient spouse.
Alternate payees not always spouses
The Internal Revenue Service notes that it is not only a former spouse that may be named as an alternate payee on a person’s 401K account. A child or other tax dependent may also be named as such. This may allow an account owner to tap into their retirement funds to satisfy child support awards.
Early withdrawal fees possibly may be avoided. Taxation would remain the responsibility of the account owner as with any child support payment.
Protecting one’s future in a divorce
Pennsylvania residents should always work with an experienced family law attorney during a divorce to ensure that details like those involving the QDRO are not overlooked. This is just one way that the right professional advice may help save people taxes and penalties down the road.