When two people start to build a life together through marriage, their assets get tied together. If these two people then decide to separate, dividing the assets is not always as easy as just giving each other their fair shares. There are some accounts with withdrawal restrictions that are more difficult to break up.
Retirement accounts are a prime example of this. Simply withdrawing a spouse’s fair share might lead to penalties, taxes and fees. Luckily, the QDRO can help.
What the QDRO is
The IRS describes this document as an order, judgment or decree that an individual can use to divide up a retirement account. The document contains specific information, such as the personal information of the owner(s) of the account and the alternative payee(s). It also details the percentage that each payee should receive.
What people use it for
When dividing up assets during a divorce, marital settlements and spousal support most often come to mind. While these are the most common reasons people rely on QDROs, they are not the only ones. The IRS adds that people can also use this to pay child support.
What the main benefits are
When people receive money from someone else’s retirement account via a QDRO, the IRS says they have the option to now roll that over into another qualified plan without paying taxes on the figure. Not paying taxes on the figure is perhaps the best benefit of using the QDRO.
What the penalties are without it
Forbes explains that without a QDRO, couples generally need to wait until becoming 59 and a half to tap into retirement accounts. If they try to withdraw money before this, they might face a 10% tax penalty.
Because of the complexities of withdrawing from a retirement account, many people turn this down during a divorce. However, dependent spouses often take this over the house and then downsize their living arrangements to stretch income while they rebuild their careers. They then have a retirement cushion to fall back on.