For many divorcing couples, one of the challenging things they have to face is how to split up their marital assets and debts. Assets that may be split include everything from homes to vehicles to investments and even include retirement savings. When it comes to an individual spouse’s employer-sponsored retirement accounts, these may be deemed joint assets and subject to being shared by both parties in the property division agreement.
As explained by SmartAsset, when a couple agrees to share one party’s 401K account, they should ensure that a qualified domestic relations order, or a QDRO, is utilized. Under normal circumstances, any withdrawal from a retirement account that does not qualify as for retirement purposes may be subject to significant penalties and taxes. These penalties and taxes may dramatically eat into the amount of money a person receives from their account.
With the use of a QDRO, the early withdrawal penalties and associated taxes may be avoided as the order clarifies that the transfer of funds is pursuant to a divorce. The spouse who receives the funds from the account holder’s 401K assumes tax responsibility for the money. Taxation on the received funds, however, may be avoided if the recipient moves the money directly into another qualifying retirement account.
The Internal Revenue Service adds that a QDRO may also be used to enable a 401K account holder to access their retirement funds to satisfy a child support order. Payments will be made to the minor child or guardian and, in these cases, the 401K account holder will retain tax responsibility for these funds.