Sunday, November 6, 2011

Retirement Accounts and Divorce: Protecting Your Rights with a Qualified Domestic Relations Order

For most families, their retirement accounts are their largest asset. While Wall Street is showing signs of recovery, the housing market still suffers from losses. So, while most people are upside down in their house, their retirement accounts are increasing in value. For families going through a divorce, retirement assets can be the most sought after property of the marriage. Protecting this asset is critical.

Retirement accounts, such as 401(k)s are comprised of pre-tax dollars and are titled only in the name of the employee who has built the retirement account. What this means is that there are substantial penalties for removing these funds before reaching the age of fifty nine and a half. On the other hand, Georgia law provides that retirement accounts are subject to division in a divorce. Federal law recognizes that retirement accounts can be divided in a divorce and has created special provisions that allow for the division of the retirement accounts without incurring penalties.

In general, Federal Law provides that a retirement account may be divided in a divorce by a Qualified Domestic Relations Order, or QDRO for short, and avoid the tax penalties. A QDRO works by allowing the retirement plan administration to roll out of the employees retirement account and set up a separate account for the spouse. The retirement plan participant does not incur any tax penalties and the spouse has a retirement account of their own which they can roll over to a retirement vehicle of their choosing. If the spouse elects to take the money out of the retirement account, the spouse incurs the tax penalty.

A QDRO is a separate order from the actual divorce decree and is drawn so exacting specifications that identify the dates of marriage and divorce as well as identify the plan participant and the spouse. If these orders are not drawn to the specifics required by the Internal Revenue Service and the plan provider. If the order does not meet the specifications, the plan provider may reject the order. Many plans have specific forms they require over and above the Federal regulations. It is important, in order to protect this valuable asset to consult your attorney. There are also many lawyers who specialize in drafting QDROs and have experience with the many peculiarities of each individual plan.

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