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How does a QDRO work?

On Behalf of | Nov 18, 2019 | Divorce

For most people in Virginia, their pensions and retirement accounts are one of the most valuable assets they have in their name. It is also one of the most important. Individuals will rely on those assets they have saved up when they retire from the workforce.

However, if individuals seek a divorce, they will have to divide the assets in their retirement. But they must do so properly, so they can preserve the assets they need and avoid tax consequences. In most cases, this requires a qualified domestic relations order (QDRO).

Yes, divorcing spouses have to divide their retirement

Virginia law requires spouses to divide their marital property equitably in a divorce. Usually, the retirement assets individuals collected during their marriage are considered marital property. Therefore, they must divide those assets like any other property they own according to:

  • How long the marriage lasted;
  • Each spouse’s age and health;
  • Each spouse’s income;
  • The value of the asset; and
  • The financial needs of both spouses.

However, dividing retirement assets is not so simple. Individuals cannot simply list how they will divide the retirement assets in the property settlement agreement like their other assets.

Spouses must use QDROs to divide retirement assets

Individuals could face significant tax penalties if they withdraw assets from their retirement too early. So, spouses must obtain a QDRO to give another person – in this case, the soon-to-be-ex-spouse – the right to collect a portion of the assets and benefits. This order also prevents any withdrawals from the account from being subject to the 10% penalty fee, as long as the QDRO includes essential information, such as:

  • The name of the individual who owns the retirement plan;
  • The name of the ex-spouse, also called the alternate payee;
  • The portion of the account the ex-spouse will receive; and
  • How the ex-spouse will collect that portion.

QDROs apply to most retirement plans that are through an employer, such as a 401(k) or a 403(b).

This process is different if spouses have individual retirement accounts (IRAs). However, it still requires a specific type of transfer to avoid consequences and move the assets properly.

Dividing retirement assets can be one of the most complex aspects of the property division process. And it is essential to make sure the QDRO is drafted correctly to avoid consequences. The attorneys at Bowen Ten Long & Bal, PC, have extensive experience assisting Virginia families through property division and can help individuals protect their assets for the future after divorce.