When it comes to property division, most people’s thoughts turn to tangible assets, such as the family home. However, a property division agreement must also consider retirement accounts.
The division of retirement benefits poses unique challenges. You can’t simply withdraw half of your 401(k) and call it a day. Tax implications and other issues can swiftly reduce the dollar amount. This where a qualified domestic relations order, or QDRO, comes into play.
A QDRO can be used to divide a wide range of retirement plans, including:
- Employee stock ownership plans
- Plans covered by the Employee Retirement Income Security Act (ERISA)
A straightforward early withdrawal will likely carry a significant tax penalty. The benefit of a QDRO is that it enables you to avoid this tax penalty. In addition, you will not have any tax liability for the transferred funds. However, the amount will be considered taxable income for the person who is receiving the funds.
Is the entire retirement plan subject to division?
In general, any contributions made to a retirement plan during the course of your marriage will be subject to division. Any amount you contributed prior to your marriage will be exempt. You may be able to reach an agreement where your retirement accounts will remain untouched. For example, you might be able to offer your ex additional assets that will equal the value of your 401(k) or pension plan.
Whether you choose to move ahead with a QDRO or opt to take a different approach to equitable distribution, you should always work closely with a skilled professional who can assist you with your available options.