How a QDRO works

It is understandable for New Jersey residents who are getting divorced to be concerned about how they may be able to pay support awards if required. They can also wonder what their property division settlement will look like and if they will owe their spouse any money for that once it is all over. Some people may have enough liquid assets or income to take care of these items. Others, however, may need to find funding in other places. Retirement accounts may be one source for this. In fact, the assets in a retirement account are sometimes split between the spouses when getting divorced.

Before husbands or wives rush to take distributions from their 401(K) accounts, they should know that it may be necessary to utilize a Qualified Domestic Relations Order. As explained by the U.S. Department of Labor, a QDRO legally establishes another person as eligible to receive funds from another person’s retirement account. The ability to do this is important because without a QDRO, money taken from these accounts may be subject to early withdrawal penalties.

Forbes reports that a tax court judge ordered a husband to pay more than $5,200 in early withdrawal penalties for taking money from his retirement account to pay a spousal support award. He did not use a Qualified Domestic Relations Order but instead relied solely on the recommendation of the family court judge.

A QDRO can be used to establish an alternate payee for the purposes of paying child support or spousal support. It can also be used to make payments pursuant to an asset division agreement. The alternate payee can be a dependent, spouse or ex-spouse of the plan holder.