Saving retirement assets with a QDRO

Residents in Illinois should understand the benefit of using a qualified domestic relations order when splitting a 401K in a divorce.

Making the choice to end a marriage can be one of the hardest decisions a person in Illinois may face. It involves letting go of many hopes and dreams for the future as well as letting go of many treasured or valuable assets.

In today's society, retirement accounts have become among some of the most commonly split assets in divorces. However, this does not mean that splitting these between spouses is simply or should be taken lightly. There are very specific ways to approach this in order to avoid some very costly consequences.

What problems might happen when splitting a 401K?

As explained by Forbes, there are two important things to keep in mind about a 401K. First, these accounts are held in one person's name only and that is the only person typically allowed to receive money from the account. Secondly, if that person takes money from the account for purposes other than retirement, they may be subject to high penalty assessments as well as taxes.

In the case of a divorce, if an account owner simply withdraws money from a 401K and gives it to a spouse, that account owner could be on the hook for paying penalties and taxes. This may happen even if the asset split was clearly identified in a divorce decree.

What should an account owner do when splitting a 401K?

The Internal Revenue Service explains that a qualified domestic relations order allows another person to be named as a legal payee on a 401K account. This person may be the spouse who will receive money per the divorce settlement. This means the account holder never receives this money, eliminating their need to pay penalties and taxes.

The spouse who receives the money may also avoid the taxes by reinvesting the money into another retirement account.

What else can a QDRO be used for?

According to the U.S. Department of Labor, a QDRO can also be used to allow an account holder to access funds in the account to satisfy a spousal maintenance or child support order.

Taxes would be handled the same for spousal maintenance as they would for a property division award. Funds used for child support would be taxable to the plan owner just as with any other child support payments.

How can I get help with retirement assets during a divorce?

Divorcing Illinois residents should always consult with an experienced lawyer to ensure that they understand the ramifications of the decisions made during the process.