As you and your spouse divide your property during your divorce, you will want to pay special attention to their retirement accounts. Your spouse may have been your household’s breadwinner, and these accounts are likely held in their name alone. Yet, they may have established their accounts – or their accounts grew in value – during your marriage. In these cases, you will receive a share of them, though dividing them can be challenging.
Understanding QDROs
To split your spouse’s retirement accounts, you two must fill out a qualified domestic relations order (QDRO). A QDRO will identify which accounts you will receive distributions from, as well as the value of these distributions. Furthermore, it will detail the manner which your distributions will occur in. Keep in mind that QDROs are only used to divide qualified retirement plans. QDROs are not used to divide individual retirement accounts (IRA), government pensions or military pensions.
QDROs can be tricky to complete, and you and your spouse will want to draft yours with the help of your attorneys. Once you finish it, you will need to send it to the administrators of your spouse’s retirement plans for their approval.
How your shares will disburse
The distributions you receive from your spouse’s retirement accounts might depend upon the types of plans they have. If you will receive part of their pension, it will likely pay out to you periodically once your spouse retires. Yet, you may be able to take lump sum payouts from other accounts. Depending on the terms of your QDRO, these could be immediate, or they may disburse in the future.
Neither you nor your spouse will pay taxes upon signing your QDRO. Nor will you pay a tax penalty for withdrawals you make from a qualified plan. If you are younger than 59 ½, though, you will have 20% of it withheld for income tax purposes. Yet, if you roll these funds into a traditional IRA, you will face a 10% tax penalty on most distributions you take before age 59 ½. If you choose to take a distribution before then, you will have to include your it on your income taxes as well.