When you are going through a divorce, it can be incredibly difficult to navigate all the different financial and legal aspects. Not only is this an emotional process as you begin to process the end of your marriage, but you’ll also need to consider matters like alimony and child custody, which can make these matters even more overwhelming. However, one thing many fail to consider when divorcing is what happens to retirement plans, as early withdrawals are subject to tax penalties. Luckily, you may be able to utilize a qualified domestic relations order. The following blog explores what you should know about this option and the importance of working with Somerset County property distribution attorneys to guide you through this process.
What Is a Qualified Domestic Relations Order?
A qualified domestic relations order (QDRO) is a document utilized during divorce to allow for the penalty-free early withdrawal of funds from a retirement account in accordance with the asset distribution process.
Typically, if someone withdraws funds from their retirement account prior to turning 59 and a half, they will incur a 10% penalty on the funds removed from the account, on top of regular income tax. As such, when going through a divorce and dividing retirement plans, the recipient spouse would incur significant taxes on the funds they receive from their spouse. To combat this, a QDRO can be utilized.
A QDRO can only be used to recover funds from plans covered under the Employee Retirement Income Security Act (ERISA). This includes 401(k)s, profit-sharing plans, 457 plans, and 403(b)s. Any form of individual retirement account (IRA) is not included, as they are not employee-sponsored plans.
What Else Should I Know About QDROs?
One of the most important aspects of utilizing a QDRO as part of a divorce is that, in order to avoid the tax penalties, the funds must be deposited into a retirement account. If the recipient does not place the funds into a retirement account, the funds will be subject to the early withdrawal tax.
You should also note that only the funds earned during the marriage are subject to division. For example, if Spouse A has $20,000 in their 401(k) before the marriage but $60,000 at the time of the divorce, only the $40,000 earned during the course of the marriage would be subject to division under New Jersey’s equitable distribution statute.
As you can see, going through a divorce is much more than the emotional process many believe it to be. There are a number of critical considerations you must make to set yourself up for financial success after your divorce is finalized. That is why it is in your best interest to work with an experienced attorney with the Siragusa Law Firm. We understand how overwhelming this process can be, which is why we will do everything possible to help you fight for the best possible outcome in these matters. Contact us today to learn how we can guide you through your divorce.