How do I know if I need a QDRO?

Divorcing Arkansas residents should evaluate carefully their choice to split a 401K and when they need a QDRO.

People in Arkansas who are beginning the process of splitting their financial worlds as part of a divorce know that this is no easy task. Even if both parties are able to agree on what needs to be done, the process involved in executing it may still be challenging.

One of the things that many spouses today choose to do is to split a retirement account as part of a property division settlement. If this retirement account is a 401K or other employer-sponsored account, the use of a qualified domestic relations order is recommended and often required.

Making the choice to split a 401K

Before deciding that a QDRO is needed, Forbes suggests that spouses should take a moment to evaluate their choice to split the retirement account. All assets should be looked at together and when this is done, it may well be that leaving a 401K to one spouse and receiving other assets is better for the other spouse.

If splitting an account is wise, consider what ratio makes sense for each person. The court will generally split the account equally, but sometimes there is a good reason one spouse should receive a larger portion. These reasons may include one spouse's earning capacity, or the parties' respective ages. The spouse who earns less will have a harder time making up what has been lost. An equal split therefore may not be in both parties' best interests.

Enter the QDRO

Once it is determined that some portion of one person's 401K will go to the other spouse, a qualified domestic relations order is warranted. As explained by the United States Department of Labor, this form legally allows the non-account owning spouse to receive money from the account. That person is identified as an alternate payee on the account.

The QDRO will itemize all transfers and payments to be made to the alternate payee. Because money never has to go through the account owner, that spouse avoids all tax and penalty liabilities. No penalties are assessed on the recipient either because of the QDRO. If the person who receives the money puts it into another retirement fund, as opposed to pulling the money out as cash, the alternate payee will also avoid taxes.

Getting guidance when splitting retirement accounts

The decision about whether or not to split an account let alone how much to share and how to execute it are just some of the things that people should consult with a lawyer about. Arkansas residents can get valuable guidance that may well save them even more money.