Many Texans have 401(k) plans or other employer-sponsored retirement plans through their jobs. When they want to get divorced, they will have to determine how their 401(k), 457(b), pension, 403(b), or defined benefit plans will be divided. While a spouse might have had a 401(k) or another employer-sponsored plan before the marriage, any amounts contributed during the marriage will be considered part of the marital estate and subject to division. Dividing employer-sponsored retirement plans in a divorce is completed by using a qualified domestic relations order (QDRO).
Why is a QDRO necessary?
There are several reasons why a QDRO is necessary when dividing employer-sponsored retirement benefits in a divorce. The plan administrator might require this type of order before the account can be divided. However, a QDRO can direct the plan administrator to divide the account and explain the percentage of an account that must be provided to the recipient spouse. Without a QDRO, a withdrawal from a 401(k), 403(b), 457(b), or another type of defined benefits plan might result in tax consequences and penalties.
Potential tax consequences of withdrawals without QDROs
Withdrawals made from these types of plans before the account holder reaches age 59 1/2 are considered early withdrawals. If an account holder simply withdraws the money and gives it to their spouse, the amount withdrawn will be treated as income by the IRS and might cause the account holder to be moved to a higher income tax bracket for the year, resulting in additional taxes. Early withdrawals also are subject to a 10% early withdrawal penalty. However, withdrawals made under a QDRO during property division are not subject to the early withdrawal penalties and will not be treated as income for the account holder.
The recipient spouse will normally be the party responsible for preparing the QDRO and should also consider rolling over the amount to an individual retirement account in their name to avoid taxes at the time they receive the funds.