The benefits of a QDRO


Illinois residents who get divorced should learn about how to manage retirement accounts to avoid penalty taxes.


When an Illinois couple must get divorced, dividing their marital estate can be very cumbersome. In addition to determining who will get what in terms of assets, debts and belongings, there are long-term impacts to many of the elements of property division settlement. How different assets are divided and the legal steps utilized can make a big difference in this.


The downside of not following the right steps


If assets are not managed properly during a divorce, spouses could end up paying money they did not expect and should not otherwise have had to pay. Such was the case in an example provided by Forbes. A family court judge ordered a man to pay his to-be former wife a certain amount of spousal support. He pulled money from his retirement account to make this payment. The amount was close to $53,000.


Despite the fact that the man did what he was instructed, he ended up with a bill from the Tax Court for 10 percent of the amount he paid to his ex-wife. The difficult thing about this example is that the tax bill was completely appropriate because a Qualified Domestic Relations Order was not utilized. Without this, the transaction was viewed as an early withdrawal which made it subject to penalties.


What is a Qualified Domestic Relations Order?


A QDRO is the legal way to tell the Internal Revenue Service that a particular distribution of funds from a retirement account is part of a domestic relations order. As noted by the Internal Revenue Service website, this could be a marital property settlement or the payment of child support or alimony.


The website for the U.S. Department of Labor indicates that a QDRO essentially sets up another person-a spouse or dependent-as an alternate payee on the retirement plan. When this plan is to be split as part of a property division agreement and the recipient spouse puts any funds into a new account, no taxes or penalties will be owed. Payments for spousal or child support can be subject to tax at the expense of the recipient.


Getting the right guidance


Clearly the man in the example above did not receive appropriate guidance during his divorce settlement. The potential pitfalls of not doing things in the right ways are great and therefore all people in Illinois who get divorced should always work with an attorney from the outset. Doing so can help to preserve more assets for long-term needs.