When divorcing, among the many types of assets that Pennsylvania residents may be splitting are retirement accounts. However, when dividing up retirement assets, some special care may be required in order to avoid paying high taxes or early withdrawal fees. Depending on the type of account being split, a qualified domestic relations order may be needed.
As explained by the United States Department of Labor, retirement accounts that are employer sponsored like 401K accounts may need to have a QDRO in order to allow payments to be made to someone other than the account owner. This is the case because generally money can only be distributed to the person who owns a fund. Similarly money is generally only allowed to be withdrawn for retirement purposes and any other distributions may be subject to penalty payments. A QDRO, however, lets another person be legally established as a qualified payee on a 401K account.
When money is taken from one spouse’s account and given to another to satisfy a property division award and a QDRO is in effect, the person who receives the money assumes any tax liability for the amount received. However, if that person invests the money into a different but qualified retirement plan, such taxes and any associated penalties may be avoided altogether.
The Internal Revenue Service adds that a QDRO may also outline plans for a 401K account to be tapped into to satisfy child support or spousal support payments. For alimony awards, the recipient spouse again has tax responsiiblities if the money is not reinvested. For child support payments, the account owner retains tax liability.
For more information, contact Louis Wm Martini, P.C.