If you and your spouse are getting a divorce and have one or more employer-sponsored 401K plans, you may well end up having to split some or all of the money in those accounts as part of your property division settlement. Splitting a retirement account in a divorce is not quite as straightforward as splitting some other assets. Without the use of a qualified domestic relations order, one person may end up paying some very high penalties and taxes.
As explained by Smart Asset, a QDRO legally allows money to be taken from a 401K plan and paid to the account holder’s former spouse without incurring the penalty that is typically assessed on any non-retirement distribution. In general, a person needs to be at least 59 years and six months old before they qualify to take a retirement distribution sans penalty.
A QDRO is a document that must be approved first by a judge and then by the 401K plan administrator. It is imperative that people receive approval of the qualified domestic relations order from the administrator prior to completing their divorce in the event that the administrator rejects or requires changes to the plan. Divorcing spouses are encouraged to file their qualified domestic relations order as soon as they have agreed to the split terms between themselves to allow time for the plan administrator review.