Getting a divorce may not be what most people in Florida want to do at the start of a new year but for some, it may provide the fresh start for a better future that they need. If this happens, it will be important for spouses to be educated about the financial aspects of their divorce. The choices made during a settlement agreement may have implications that the average person is unaware of but that could have significant consequences that should be provided for up front.
One issue that the U.S. Department of Labor describes is the risk of paying high taxes and early withdrawal penalty fees on money taken from a 401K account and paid to a former spouse as part of a property division settlement. This might happen if a qualified domestic relations order is not used and can further cut down the amount of retirement money that the account-holding spouse is left with.
A QDRO establishes the other spouse as eligible to receive payments from the 401K account pursuant to the divorce agreement. The spouse who owns the account therefore is able to avoid the fees and taxes. The receiving spouse may avoid the taxes as well by simply reinvesting the money into another retirement fund.
The Internal Revenue Service adds that a QDRO may also be used to allow a plan participant to access 401K funds to satisfy a spousal support award. In this case, the benefit of the QDRO is like that for a property division award where the penalties and taxes are avoided as money is paid directly to the other spouse.