Retirement assets are marital property in Pennsylvania. If you and your spouse are divorcing, you will need to divide your 401(k), pensions, and other retirement assets. A qualified domestic relations order (QDRO) is the legal order you’ll need. A QDRO establishes a spouse’s right to receive a percentage of a qualified plan’s account balance or future benefit payments.
What Does a Qualified Domestic Relations Order Protect?
A QDRO shifts the responsibility to the spouse receiving a portion of the retirement account for any related income taxes accrued when the money is received as a pension, monthly payment or withdrawal. It allows the spouse to withdraw the money and transfer it to his or her own IRA within the limits permitted by the retirement plan. A QDRO is also important because it guarantees that the transfer of assets from one spouse’s retirement account to the other spouse’s retirement account is tax-free. If you do not use a QDRO, the transfer of retirement assets may result in taxes and penalties.
If you transfer retirement assets to your former spouse without a QDRO, the money will be a taxable distribution to you. You will owe the IRS for the money that goes to your ex-spouse. Your ex will get that money tax-free. You may also receive a ten percent premature withdrawal penalty.
Establishing a QDRO
If you own retirement assets, talk to your divorce attorney about a QDRO. Your divorce agreement will need to specify that you are establishing a qualified domestic relations order under the state’s domestic relations laws and Section 414(p) of the Internal Revenue Code. You will need to include your name and mailing address and the name and address of your ex-spouse. You should list each account and the dollar amount or percentage of benefits payable to your former spouse. If your divorce attorney is not familiar with QDRO’s, consult a tax professional before your divorce becomes final.