Divorce can be a complicated process, especially when it comes to dividing assets like retirement accounts. One important tool that is often used in divorce proceedings to divide retirement accounts is a qualified domestic relations order.
Those getting a divorce may wonder what a qualified domestic relations order is and how it works. It is important for couples who have questions about how divorce could affect retirement accounts to take a close look at this issue.
What is a qualified domestic relations order?
According to the Department of Management Services, the court must approve a QDRO before someone can receive a portion of the benefits from their spouse’s retirement account due to divorce. This legal document establishes the right of an alternate payee (usually the non-employee spouse) to receive these benefits. For example, a 401(k) or pension plan, as part of a divorce settlement. It also allows for the division of retirement benefits between spouses without triggering tax consequences or early withdrawal penalties.
The main purpose of this order is to divide retirement benefits fairly and in accordance with the terms of the divorce agreement. Without such an agreement, the spouse who earned the retirement benefits would typically be the sole beneficiary of those benefits, even in the event of a divorce.
How do these orders work?
When a divorce agreement includes the division of retirement benefits, couples can draft a qualified domestic relations order and submit it to the retirement plan administrator for approval. This order specifies the amount or percentage of the retirement benefits that the alternate payee will get. Once the order becomes approved by the plan administrator, the alternate payee receives the benefits. It is important to note that these orders must meet certain requirements to be valid. For example, they must clearly identify the retirement plan and the parties involved, specify the amount or percentage of benefits paid to the alternate payee and comply with the terms of the retirement plan.
By establishing the right of the alternate payee to receive a portion of the retirement benefits and ensuring that the division occurs in a tax-efficient manner, a qualified domestic relations order helps both spouses achieve a fair and equitable division of this important asset.
