The division of marital assets is a major aspect of any divorce agreement. Real estate, bank accounts, automobiles and even retirement accounts can all be fair game for inclusion in the property division plan. Many divorcing couples may not be aware of a legal instrument that allows for retirement accounts to be distributed to the non-owning spouse, without the usual penalties. For more information about how retirement accounts are distributed during divorce, read below.
Ownership of the Retirement Account
With few exceptions, all retirements account funds, such as 401k accounts, regardless of who owns the account, are considered marital property, with the exception of funds deposited prior to the date of the marriage. IRA accounts have their own rules about how funds are distributed in a marital settlement agreement.
Qualified Domestic Relations Orders (QDRO)
This legal instrument allows the spouse of the fund's owner to withdraw any, or all, of the account's funds and to do so without incurring a penalty before the divorce is final. While this can be an area of contention between divorcing couples, keep in mind that a judge will view the retirement account as marital property, regardless of whose work funded the account.
If you or your spouse own retirement accounts and agree to share the funds, a QDRO should be included with the divorce petition. If a couple cannot agree to the disposition of the retirement account, a judge will rule on the QDRO before the divorce becomes final. Keep in mind that the QDRO is a separate document and may be filed independently from the divorce petition. While your divorce petition may make mention of the QDRO or the disposition of retirement funds, this is not sufficient without the actual QDRO.
Timing is Important
As stated above, the QDRO should be completed as soon as the divorcing couple agree, or by scheduling a hearing before a judge. Not only does the law specify the QDRO be completed and filed prior to the divorce being final, the complicated nature of dealing with the administration of retirement fund accounts means that a high priority should be placed on understanding how that fund will be distributed. The funds in the retirement account are only one aspect of marital property, and deals made without full knowledge of the fund's payout rules could be unfair.
Many couples make agreements that include retirement funds to be given in lieu of other property. For example, a spouse may agree to accept the funds in a retirement account instead of the family home. The spouse may be planning to use the funds to purchase a home. Before signing that agreement, the fund administrator should be contacted to confirm that the funds will be distributed lump-sum, instead of monthly, which could make the property settlement agreement unfair.
It should be noted that while there is no penalty for the early withdrawal of funds through a QDRO, the recipient, or alternate payee, is still responsible for either paying taxes on the withdrawal or rolling the fund over into another plan.
QDRO's an be complicated, and the rules may be confusing. Make sure that you discuss the benefits of using a QDRO with your upcoming divorce with a family attorney.
