Using a QDRO to prevent more asset loss

A qualified domestic relations order may allow Illinois residents to salvage some of their retirement savings from loss during a divorce.

Illinois residents who get divorced have good reason to be concerned about their ultimate property division settlement. The emotional losses associated with a divorce can be bad enough but when the financial and material losses of belongings or assets are added, things can feel even worse. Next to a home, a person's 401K account may be one of the largest assets a couple has. Given that it does not generally have any debt associated with it like a mortgage and a house, it can be considered quite valuable in the marital estate.

When a couple must split the proceeds of a 401K as part of their divorce settlement, there are special things to which they must pay attention to. One of these is the use of a qualified domestic relations order.

What is a QDRO?

A qualified domestic relations order is a way of legally establishing a person as eligible to receive distributions from a 401K account that they do not own. The United States Department of Labor explains that this person is called an alternate payee.

A woman who has an employer-sponsored 401K account will own it in her name only even if it is considered to be a marital asset. If she and her husband get divorced and the husband is supposed to receive a portion of the money in the 401K, a QDRO would identify him as the alternate payee. This would allow money to be paid directly to him per the divorce agreement.

Why is a QDRO needed?

Many people wonder why the details of a 401K account cannot simply be detailed in a divorce decree. This may happen but doing so will not allow money to be paid to anyone other than the account owner.

According to the Internal Revenue Service, if the wife in the example above simply had a distribution paid to her that she then and gave to her former spouse per their divorce agreement, she may be subject to early withdrawal penalties as well as taxes on the money received.

If a qualified domestic relations order is used, however, the wife may avoid the penalties and the tax responsibility for any money distributed to the husband is transferred to him. The husband may avoid paying taxes by ensuring the money is reinvested into another qualifying retirement account.

How can I learn more about the QDRO?

When considering a divorce, Illinois residents should talk with an attorney to learn about the various ways in which they may reduce some of their financial losses. When it comes to a QDRO, there are many steps that must be taken in order to ensure it is setup properly. Getting help from a professional is always encouraged to avoid mishaps with these important documents and transactions.