A qualified domestic relations order allows a person to access 401K money to pay spousal and child support and when splitting an account in a divorce.
Once a couple in Arizona makes the tough decision to get divorced, their attentions logically turn to the details of this event. Despite what some may think, it is not enough to simply agree that each person will get certain items or a certain percentage of some assets.
There may well be specific processes or tools needed in order to avoid unpleasant consequences from some of the decisions or agreements reached. The use of a qualified domestic relations order is a perfect example of this.
Retirement accounts and property division
It is not uncommon anymore for a couple to agree to share the proceeds of one spouse’s 401K account when they get a divorce. However, this money is technically owned by only one person as the account is in one spouse’s name. In order for the other person to receive money from that account, the United States Department of Labor explains that a qualified domestic relations order will be needed.
The QDRO allows the non-account owning spouse to be named an alternate payee. Money can then be paid directly to that person rather than to the account owner. If paid to the owner of the account, early withdrawal fees and taxes may be assessed on the distribution.
The person who receives the money from their spouse’s 401K may avoid taxes at the time of receipt if they reinvest the money into another qualifying retirement fund.
Retirement accounts and spousal support
The Internal Revenue Service explains that a qualified domestic relations order may also provide provisions for a person to access their 401K assets to satisfy a spousal support award. Payments may be in installments or on a one-time basis.
CNN Money indicates that currently these payments would be taxable to the recipient. However, under the newly signed tax legislation, this will be reversed for all new divorce agreements starting January 1, 2019.
The goal of this change was to allow more tax money to flow to the government. This is based upon the premise that the person who pays alimony generally makes more money than the recipient and would therefore be in a higher tax bracket. By assessing taxes on the higher earner, more tax revenue would theoretically be received by the IRS.
Proper guidance is a must
Regardless of whether retirement money is tapped into for an alimony award or a property division settlement, divorcing spouses in Arizona should always consult an attorney before making any final agreement.