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Protect 401K savings with a QDRO

Utah spouses who are getting divorced and may have to split their 401K accounts should understand the benefits of the QDRO.

Loss is unfortunately a natural part of getting divorced. Utah residents who must end their marriages know that they give up many dreams and hopes for their futures. They also commonly end up losing some of their possessions or financial assets as part of their property division settlements.

Given this, it is understandable that divorcing spouses would want to find ways to minimize these losses. The use of a qualified domestic relations order is one way that they may do just that.

When is a QDRO needed?

A QDRO should be used by any person who is splitting the funds in a 401K account with their to-be former spouse as part of a divorce agreement. As explained by the United States Department of Labor, a qualified domestic relations order allows the spouse who does not own the account to receive money directly from it.

Why can't I just withdraw money and give it to my spouse?

According to the Internal Revenue Service, any distribution from a 401K account that is not specifically for retirement purposes may be subject to not only taxes but also early withdrawal penalties.

A distribution pursuant to a divorce decree does not meet the retirement qualifications and may then result in an account owner losing even more of their savings in these fees. With the QDRO in place, money can be sent directly to the other spouse so that the spouse who owns the account does not get hit with the early withdrawal fees.

The spouse who receives the money would then not be liable for such fees because the qualified domestic relations order would be in place. As far as taxes are concerned, the recipient spouse would assume liability for any taxes. However, immediate payment of taxes may be avoided by reinvesting the money into another qualifying retirement account. The taxes would then only be due once money was received at a later time, including for retirement.

Is it easy to set up a QDRO?

While a qualified domestic relations order may seem rather straightforward, there are many steps involved in ensuring it is legally binding. From getting the approval of the 401K plan administrator to properly documenting payment amounts and dates and more, the involvement of an attorney who knows about these details is recommended. Utah residents should reach out to a lawyer early in their divorce process to make sure things like this are not overlooked or mishandled.

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