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What should be included in a QDRO?

Provisions that protect people in the event that one spouse dies are some things to be included in a qualified domestic relations order.

Spouses in Arkansas face some challenging emotional moments and even feelings of loss. Finding ways to keep other losses to a minimum, such as financial losses, can be important in helping people navigate this very challenging experience.

After potentially losing a family home and even having to split treasured possessions like family photos, the thought of saying goodbye to a large chunk of retirement savings can be hard to face. Fortunately people who must split 401K accounts or other funds that qualify under the Employee Retirement Income Security Act of 1974 may find some relief by using a qualified domestic relations order.

The basics of a QDRO

Retirement accounts are meant to fund retirement, as the name implies. Hence, when people take money out of these accounts for other purposes, they are commonly required to pay high penalties as well as taxes on the distributed money.

The Internal Revenue Service allows for a qualified domestic relations order to help people avoid these taxes and penalties if they are splitting their 401K account as part of a divorce agreement. This happens in two ways. First, the QDRO names the spouse who does not own the plan as an alternate payee. This avoids the plan participant from being deemed as taking an early withdrawal because money goes directly to the other person. Secondly, the taxes may be avoided altogether if the recipient puts the money into another retirement account.

A QDRO may also be used to allow a person to access retirement funds to satisfy a spousal or child support award. In the case of spousal support, taxes are handled in the same way as with a property division award. For child support, however, the plan participant retains tax responsibility.

Death benefit provisions

If an alternate payee dies before receiving all of the money they were allotted as part of a QDRO, the order should ideally stipulate that the remaining distributions be paid to their estate. This maintains any estate plans they had in place and protects their heirs.

On the other side, if the plan owner dies before all money is paid to the alternate payee, that alternate payee spouse should be identified as the surviving spouse for the purposes of that retirement account.

Divorce financial guidance is important

When ending a marriage, it is important for Arkansas residents to get proper guidance to help them navigate challenging financial decisions. Talking with a family law attorney is recommended for this purpose.