Many Colorado couples make the decision that they do not wish to remain married to one another and would rather be divorced. When this happens, the two ex-spouses will have many things to take into consideration; such as custody of any dependent children, asset allocation and property division. Certain assets, like a retirement fund, may be tricky to divide. Complex property division issues such as these have solutions that may not be simple — but that does not mean they are not worth pursuing.
Financial experts say that one way to allocate part of a retirement fund to an ex-spouse is to have a qualified domestic relations order, or QDRO, drafted during divorce proceedings. One thing that a QDRO can be used for is to have a portion of a retirement fund placed in the name of the spouse who was not the plan participant. It may be the best course of action if one spouse has a particularly larger retirement fund than the other, or if one of them doesn’t have one at all.
If a QDRO is not obtained, the money a spouse gains from the retirement fund of an ex could be taxed as regular income by the IRS. The QDRO does not eliminate taxing; it simply applies the normal tax laws that a retirement plan would be subject to. The ex who receives the funds from the retirement plan will be responsible for paying the applicable taxes on it.
Those Colorado families who are considering divorce may wish to educate themselves on tax laws that surround former spouses. Matters of complex property division such as these require careful attention to detail. Above all, it is imperative that lines of communication are kept open so that everyone involved can have their best interests served.
Source: Forbes, “Taxes From A To Z (2014): Q Is For QDRO“, Kelly Phillips Erb, March 31, 2014