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The power of the QDRO

Divorcing couples in Illinois should learn how a Qualified Domestic Relations Order can help them when splitting retirement accounts.

With the National Center for Family and Marriage Research noting the rise of divorces among people over 50, many divorcing couples in Illinois logically become concerned about retirement funds. Certainly preserving these assets as retirement age nears, avoiding unnecessary losses here is important for anyone getting divorced. Retirement accounts can be identified as marital property, making them subject to being split during a divorce.

What is the risk to retirement assets?

The Plan Sponsor Council of America notes that when money is taken from retirement funds before the account holders reach the age of 59-1/2, early withdrawal taxes can apply. These taxes can eat up 10 percent of the amount of money withdrawn. This is the risk to divorcing couples who must split these assets pursuant to their divorce settlements.

How can this be avoided?

When a divorce stipulates that one spouse is to receive a certain part of the other spouses 401(K) or 403(b) account, the early withdrawal tax can be avoided with the use of a QDRO according to Investopedia. The Qualified Domestic Relations Order outlines all of the provisions of the funds transfer and prevents the transaction from being identified as a standard early withdrawal.

If a QDRO is not filed and money is moved from a retirement account and given to the other spouse, the money is subject to tax. This is the case even if the transfer is noted in a divorce decree.

It is also important to know that all details and requirements of the QDRO must be followed completely. The Plan Sponsor Council of America recounted a story in which an account holder failed to provide some of the requested information and, as a result, he was forced to pay the 10 percent tax. His withdrawal amount was $1 million which left him to pay $100,000 in taxes because his QDRO was invalidated due to the lack of full information.

The Huffington Post notes that a QDRO essentially allows couples to withdraw money from retirement accounts before retirement age without tax implications for qualifying domestic relations orders.

How can Illinois couples be protected?

The best way to stay protected against the assessment of early withdrawal taxes is to work with an experienced attorney at all phases of a divorce. Retirement funds are critical to today’s couples and taking a risk on losing large portions of these assets is never wise. Talk to a lawyer as soon as divorce becomes an option to prevent this.

Keywords: divorce, retirement, property, assets

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