How to Divide Retirement Accounts With a QDRO

If you’ve started the divorce process or are considering it, then the question of what will happen to your retirement accounts has likely come up. This is an extremely emotional topic as there’s so much time and discipline that goes into saving for retirement, not to mention the dreams you and your partner once had of growing old together. 

Now, it’s time for these joint assets to be split. Navigating this process take time and thoughtfulness. Most importantly, it’s critical that you and your partner try to remain respectful throughout the process so that you do not end up getting shorted.

As you go through divorce proceedings, spouses can get anything from a portion to the entirety of funds from the other’s 401(k) or IRA. There are very clear legal procedures that stipulate how to divide these accounts so that you can avoid taxes and penalties. It’s important that you have an attorney who is experienced in navigating these rules so as to avoid a financial headache.

How to Split a 401(k)

Splitting a 401(k) requires a document known as a Qualified Domestic Relations Order (QDRO). This is ordered during the divorce proceeding. Through a QDRO, an individual can transfer their 401(k) assets to their former spouse without having to pay taxes or penalties.

What is a qualified domestic relations order? 

The first step to getting a qualified domestic relations order is to get it ordered by the court as a Domestic Relations Order (DRO). An experienced family law attorney can help with this. The QDRO is to your ex-spouse’s 401(k) plan administrator. It directs the administrator to pay the funds noted in the divorce settlement to the recipient. Once a DRO is received by the plan administrator, they will look at whether it is qualified. If it is deemed qualified, it will become a QDRO.

After it is approved, you will be given the choice to roll the plan assets into an IRA without taxes or take a distribution that will be subject to income tax. Distributions from a 401(k) are exempt from the 10% early distribution penalty, which allows those who are younger than 59.5 to get penalty-free distributions. Even though you aren’t penalized, you must remember that income tax will need to be paid on the distribution.

The timing of your distribution will still be dependent on your plan’s rules. A QDRO can’t force or overrule 401(k) plan rules that differ from the existing distribution options. Be sure to check with your plan administrator to understand the rules. 

Rolling Over a 401(k)

When you receive funds due to a QDRO, your ex can initiate an IRA rollover. This is completely tax free, which makes it a great option for individuals who might not need money right away. When you rollover these funds, they’ll be deposited into an IRA that is owned by you and subject to your IRA’s account rules.

IRAs

It is important to note that a QDRO cannot be applied to an IRA. The QDRO is only applied to 401(k) accounts. According to NerdWallet, “The main difference between 401(k)s and IRAs is that employers offer 401(k)s, but individuals open IRAs on their own, through a broker or bank. IRAs typically offer more investment options, but 401(k)s allow higher annual contributions. The contribution limit for 401(k)s is $22,500 in 2023 ($30,000 if age 50 or older).”

Divorce is a messy process. If you need assistance on how to divide retirement accounts with a QDRO, let us help you navigate the ins and outs and ensure you get a fair and favorable outcome. As Concord, New Hampshire divorce attorneys, we’ve helped thousands of men and women through the process of divorce. Whether you’re looking for a simplified solution or have a more complicated case, we’re here to help you.

Category: Qualified Domestic Relations Order

This post was written by Cohen and Winters