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Using a qualified domestics relations order

Connecticut residents may be interested in learning about how a qualified domestic relations order works as it pertains to divorce settlement. In some cases, the court may order than an ex-spouse or dependents may be able to receive part of a 401(k). In this event, the terms of how much they are entitled to and when they will be able to receive payments from the 401(k) will be established in the QDRO.

Typically, a QDRO is implemented to pay child support, property rights payments or alimony. The process works by the court establishing an alternate payee for the retirement account, which can be a former spouse, child or any other dependents. Whenever money is withdrawn from the account under the terms of the QDRO, the 10 percent penalty associated with the federal income tax early withdrawal is waived. However, this only applies if the QDRO has been set up properly. A QDRO that is not set up properly will be subject to the tax fee.

If the court has established that an ex-spouse is entitled to QDRO payments, there are several options available. The alternate payee may withdraw the funds in cash to help with immediate needs. This may not be the best method though because putting the money into a tax-sheltered fund could be more beneficial. The alternate payee may also choose to take a lump-sum distribution, but the money will be subject to taxes on the whole amount as soon as the money is withdrawn.

The QDRO is only valid if it has been accurately verified and established. Complex property division can be difficult to understand. The benefits and disadvantages associated with a QDRO can be arduous; a divorce attorney may be able to help provide answers to any questions that arise.

Source: 401k.org, "401(k) and Divorce", January 07, 2015

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