QDRO Rules Use of 401(k) in Divorce

Woman holding a baby and little kid next to her

It’s smart for a young person to think about a retirement that — while still 40 or 50 years away — is pretty much inevitable. Here’s a harder one: information good to file away for if and when a marriage winds up in divorce, although that young person might never marry or may not even have yet met his or her future spouse.

The information might also, unfortunately, be relevant now. So it’s good to know about the imposition of a Qualified Domestic Relations Order, or QDRO (cue-DRO), an exception to the 10% penalty on distributions from a qualified plan (but not an IRA).

A QDRO is often put into place as part of a divorce settlement, especially when one spouse has a considerably larger retirement plan balance than the other. The court determines what amount (usually a percentage, although it could be a specific dollar amount) of a retirement plan’s balance is to be presented to the non-owning spouse. Once that amount is determined and finalized by the court, a QDRO is drafted and provided to the non-owning spouse, which allows him or her to direct the retirement plan custodian to distribute the funds in the amount specified.In the case of a QDRO, the owning spouse will not be taxed or penalized on the distribution. In addition, if the non-owning spouse chooses to roll the distribution into an IRA, there would be no tax or penalty on the distribution to him or her, either. If the non-owning spouse chooses to use the funds in any fashion other than rolling over into another qualified plan or IRA, there will be tax on the distribution, but no penalty.

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