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Using a QDRO when dividing retirement accounts during divorce

On Behalf of | Oct 17, 2024 | Asset Division |

Married couples who have enjoyed a degree of financial success may find themselves facing very difficult divorces. They likely have more assets to divide and feel strongly about preserving their comfortable standard of living.

One of the ways people leverage their income and resources for long-term happiness is through retirement savings. They use their current income to prepare for their future economic needs. Those savings can be a challenge to address effectively during a divorce.

People may worry about losing money to taxes and penalties, especially if they used accounts like 401(k)s to set aside their income for the future. A qualified domestic relations order (QDRO) is a very valuable tool for those preparing for a divorce and expecting to divide their retirement savings.

What does a QDRO do?

A QDRO is essentially a document that provides instructions for dividing a tax-deferred retirement savings account after a divorce. Typically, one of the lawyers representing the spouses during the divorce drafts the QDRO based on the terms set in the final property division order.

Both spouses have to approve the document before its submission to the financial professional managing their retirement savings. When drafted and recorded appropriately, a QDRO allows for the penalty-free division of retirement savings.

Couples don’t lose 10% of the account balance in penalties and do not have to worry about a significant jump in income that triggers tax consequences. Each spouse receives a certain percentage of the balance of the original account in accordance with the property division order.

QDROs are not always necessary

Many couples can reach property division terms that do not require the direct division of retirement savings accounts. It is also possible for a judge applying property division statutes to reach determinations that comply with the law but do not directly divide every asset that belongs to the spouses.

QDROs are very useful tools, but they are not always necessary. The spouses or the courts can establish arrangements that allow for an appropriate division of assets without specifically splitting the retirement savings.

Learning more about the tools that can help those preparing for complex divorces with high-value assets can take much of the fear out of the divorce process. QDROs are useful but are not universally necessary even when spouses have tax-deferred retirement savings accounts.

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