For many people in Mississippi, their retirement plans and their homes can be their two largest financial assets. Therefore, concerns about how to address a division of these assets when getting a divorce is understandable. Employer-sponsored retirement accounts like 401K accounts must be handled carefully when splitting them in a divorce in order to avoid losing unecessary money.
The United States Department of Labor explains that withdrawals from a 401K account are typically only allowed by the person who owns the account. In addition, any withdrawals by that account owner that do not meet the criteria for retirement purposes may be subject to early withdrawal penalties as well as income tax. This means that if a person who owns a 401K takes money out of that fund and pays it to a former spouse as part of a property division settlement might be subject to these penalties and taxes.
The use of a qualified domestic relations order allows a former spouse to be named as an alternate payee on the 401K so that money can be paid directly to that person, bypassing the account owner altogether. The QDRO therefore prevents the owner of the fund from losing money in the form of penalties and taxes.
The Internal Revenue Service adds that a spouse who receives distributions pursuant to a QDRO from a former spouse’s 401K account may be able to avoid paying taxes at the time by reinvesting the money into another retirement account. The administrator of the 401K plan must review and approve all qualified domestic relations orders.