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How are qualified retirement accounts transferred during divorce?

Adults who are going through a divorce will have a lot of factors to work through. One is how to divide the property. While it might be easy to decide what happens to smaller assets, larger ones can often be more challenging. One type of asset that can lead to significant problems is a retirement account.

Many requirement accounts, including a 401(k) and 403(b), require a qualified domestic relations order to transfer from one spouse to the other due to divorce. Individual retirement accounts use a different method, which is known as a transfer incident to divorce. When it comes to the QDRO, there are some specific points that must be covered for it to be valid.

What does a QDRO do?

A QDRO names a person as an alternate payee for a retirement account. It is only necessary if part of it is going to the spouse who isn't the owner. The order will usually initiate the transfer while both parties are still alive, but it can also provide survivor benefits when the person named on the account passes away.

A valid QDRO must be issued by the court and has to include specific information. Each party's name and mailing address must be included. The percentage of the account value that is being transferred and the schedule for the transfer must be clearly noted. It should also denote the method used in the determination of the percentages.

Once the court issues the document, it is sent to the administrator of the plan. It is reviewed and is accepted if there are no problems. A QDRO that has issues will be rejected with information about how to correct the problems. It is accepted once everything is fixed.

Why are QDROs necessary?

It is possible to transfer all or part of a retirement account to your ex. However, doing so without a QDRO would mean you have to pay early withdrawal penalties. There might also be tax consequences. This cuts down on the value of the retirement account, which could impact both parties.

When retirement account division is necessary, ensure that you have the documentation that you need to make it happen without penalties or added taxes. This helps to protect your interests so that you get what is due to you.

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