Importance of QDROs when dividing retirement accounts

Many divorcing individuals in Louisiana have 401(k) plans, IRAs or pensions that they have built during their marriages. Like other types of marital assets, the amounts contained in retirement plans are the community property of the couples and subject to division. Dividing a retirement plan is not as simple as it may seem. If an account holder simply withdraws half of the accumulated balance to transfer it to his or her spouse, penalties may apply. Instead, retirement plans must be divided under qualified domestic relations orders to avoid unintended tax consequences and penalties.

What is a qualified domestic relations order?

Also known as a QDRO, a qualified domestic relations order is a specific order that is issued by the family court at the time that a divorce decree is issued. It directs the administrator of a retirement plan to divide the assets held by a person and distribute a specific percentage of the balance to his or her former spouse. The receiving individual can either accept the money as a lump-sum distribution or roll it over into a new retirement account that his or her name on it. However, taking a lump-sum distribution will subject the receiver to taxes.

Consequences of dividing retirement plans without QDROs

Dividing a retirement plan without a QDRO can result in several consequences. If the account holder is younger than 59½ at the time the distribution is made, he or she will be assessed a 10% early withdrawal penalty and will have to pay income taxes on the amount that he or she withdraws. Someone receiving a lump-sum payment will also have to pay taxes on the amount of money that he or she receives. By using a QDRO to complete the distribution, the account holder can avoid penalties and taxes. If the receiving spouse rolls the money over into a new account, the money can continue growing tax-free until retirement.

People who want to divorce and have complex asset division issues may benefit from retaining experienced family law and divorce lawyers. An attorney may help someone understand the potential tax consequences that might come with taking different assets in the divorce. This may help an individual minimize the taxes that he or she may be required to pay.