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Dividing retirement accounts: 4 things to know about QDROs

By now, the line may seem so old that it serves as a mantra: Marriage is about love and divorce is about the money.

This isn't necessarily a bad thing. As we noted in a recent post, there is such a thing as good divorce.

But if you are involved in a divorce that involves dividing a retirement account, it's important to understand how qualified domestic relations orders (QDRO) can be used effectively for that purpose. In this post, we will take note of five useful things to know about QDROs.

QDROs can be used for others besides a spouse.

QDROs are court orders directing a retirement plan to make certain payments to someone other than the account holder.

The payments may be directed to a spouse, but they may also be to a former spouse or to a child. Indeed, they can also go to another dependent.

QDROs are often used in dividing marital property, to give a spouse a share of the retirement funds earned by the other spouse during the marriage.

But QDROs can also be used in certain cases to transfer money for child support or spousal maintenance obligations.

QDROs help you avoid tax consequences.

Federal law generally does not allow participants in retirement plans to withdraw money early without facing tax penalties.

This is not only because of the Internal Revenue Code. It is also because of a complicated law called the Employment Retirement Income Security Act of 1974, otherwise known as ERISA.

What a QDRO does is allow for retirement accounts to be divided without triggering penalties under ERISA and the tax code.

Accountants can play a key role in crafting a QDRO.

In many divorces, a cash distribution of retirement assets from a QDRO will trigger tax consequences. A CPA can help with in planning for that and structuring divorce settlements accordingly.

In high net-worth divorces, highly paid business people may have stock options that are included along with their 401(k), pension or other retirement plan. In those cases, the advice of a CPA can help an attorney craft a QDRO focused on the assets that make the most sense for the client's financial goals.

QDRO is pronounced quad-row.

If you are new to the term QDRO, it is time to add it to your lexicon. It is pronounced quad-row.

Your attorney can tell you more about how they work and help you take the steps that make the most sense for your situation.

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