Do I Need a QDRO in My Divorce?
By: M. Scott Gordon
If you are thinking about divorce and you know both you or your spouse have significant retirement benefits, you should anticipate that a significant portion—if not all—of those retirement benefits will be divided. The retirement benefits earned during your marriage are classified as marital property and will be subject to division unless you have come to an agreement otherwise through a prenuptial agreement. In short, most retirement benefits earned during the marriage are considered to be property of the marriage under the Illinois Marriage and Dissolution of Marriage Act (IMDMA), which means they will be distributed between the spouses according to a theory of equitable distribution.
Like the money in a checking account or an automobile, retirement benefits cannot always be distributed as easily as other assets. Instead, you may need a Qualified Domestic Relations Order (QDRO) to remove assets from a retirement account without paying additional penalties. We want to say more about how a QDRO can be beneficial in a Chicago divorce.
What is a QDRO?
QDROs can be used for multiple purposes, but often are beneficial to couples getting divorced with retirement accounts. According to an IRS fact sheet, a QDRO is “a judgment, decree, or order for a retirement plan to pay child support, alimony, or marital property rights to a spouse, former spouse, child, or other dependent of a participant.” The QDRO is required to contain certain information, including the following:
A common type of retirement account for which a QDRO can be used is a 401(k). In order to be divided, most types of retirement accounts will require you to have a QDRO, but there are some exceptions. For example, an individual retirement account (IRA) does not require a QDRO. Then, if you have a retirement plan under the Illinois Pension Code, you will need something that is similar to a QDRO, but is state-specific: a Qualified Illinois Domestic Relations Order (QIDRO).
Why QDROs are Beneficial in Divorces
In order to take any money out of retirement accounts before the legal age of retirement, you will typically pay a 10 percent penalty for an early withdrawal. A QDRO allows you to avoid that early penalty if assets from the retirement account are distributed immediately through the divorce process.
However, just because you have a QDRO does not mean you will not be required to pay taxes on the withdrawn amount in the future. Typically, the owner of the assets pays taxes on them. For example, when retirement assets are transferred to the other spouse during divorce through a QDRO, the recipient will eventually be responsible for the taxes. However, it is possible to avoid paying both the penalty and the tax (at this time) on retirement benefits if the recipient spouse rolls over the benefits into his/her own retirement account.
It is important to remember that rolling over benefits does not allow you to remove them at a later date without paying the penalty.
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