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Understanding QDROs

Texas residents who are getting divorced and have retirement accounts should pay special attention to these assets during their property division settlement agreements. Even though these accounts are held in one spouse's name only, they may be subject to division as part of the joint marital estate. This may expose one or both parties to the risk of paying taxes or penalties if the division is not properly handled.

As explained by the Internal Revenue Service, a qualified domestic relations order forms a legal court order outlining how some retirement accounts are to be divided between divorcing spouses. A QDRO can also be used to approve and outline the terms of use of a retirement account to satisfy spousal support or child support awards.

According to Fox Business, many people fail to appropriately account for the tax implications of splitting their retirement accounts when getting divorced. A QDRO should be used when splitting any ERISA-qualified account and the terms should stipulate that the benefit received by the non-account owner be reinvested into another qualifying retirement plan. When distributions are received in cash and without a QDRO, the Internal Revenue Service may consider them to be unapproved retirement distributions. These amounts can then be subject to early withdrawal penalties and taxes.

QDROs should also include provisions for the death of either party prior to the completion of any transfer of funds. For the person receiving money, any intended amount should be funnelled to the estate. If the account owner dies before completion, the other should be the surviving spouse for the designated amount.

 

 

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