When a marital estate includes retirement savings, those funds can be a point of contention during divorce. Many people feel anxious about dividing what they have saved for retirement.
In many cases, people feel anxious about not just needing to split the account balance but also the risk of secondary financial consequences. Withdrawing funds from a tax-deferred retirement savings account before reaching retirement age can lead to increased income tax obligations and a 10% penalty.
A qualified domestic relations order (QDRO) allows for the division of a 401(k) or similar account without penalties. Who has to approve a QDRO to divide a retirement account after divorce?
QDROs should reflect the property division order
Typically, one of the divorcing spouses arranges to have their attorney draft the QDRO. The final terms agreed upon by the spouses or established by the judge hearing a litigated case influence the instructions contained in the QDRO.
Typically, both spouses have to review and sign the QDRO to ensure it includes the correct information. The document also requires approval from the courts prior to its submission to the financial professional managing the retirement account. These steps help reduce the risk of financial misconduct that subverts the property division order.
Provided that spouses follow the appropriate process, a QDRO makes it possible to split retirement savings without incurring penalties and dealing with income tax consequences. Each spouse has control over an account in their name with a portion of the original account’s balance.
Learning more about the final steps required to fulfill the terms of a property division order can help people during divorce. People with retirement savings often need to arrange to divide those resources after the final decree.
