Divorcing spouses know that they must disentangle their combined lives as they prepare to move into a new phase of life as a once-again single person.
Through this process, assets and debts may need to be split. Depending on the nature of a couple’s marital estate, one spouse’s 401K may be shared between both spouses as part of their divorce agreement. A qualified domestic relations order may benefit couples as they do this.
How the qualified domestic relations order works
A qualified domestic relations order, also referred to as a QDRO, legally identifies a third party as an authorized payee on another party’s employer-sponsored retirement account. As explained by the United States Department of Labor, the QDRO allows funds from one person’s 401K account to be paid directly to the authorized payee pursuant to their divorce agreement.
Without a QDRO, the account owning spouse would need to withdraw money from their 401K and pay their former spouse the amount agreed upon in their divorce settlement. If this happens, the account owner may pay early withdrawal fees and income taxes on the funds received from the 401K, reducing the amount of retirement savings they have left.
Taxes on distributions pursuant to a QDRO
According to the Internal Revenue Service, when funds from a 401K flow directly to an authorized payee per a QDRO, the responsibility for income taxes on that distribution land with the recipient, not the account owner. The recipient may postpone taxes by reinvesting the money into another qualifying retirement account. No early withdrawal fees are assessed on distributions made per a QDRO.