Losing parts of your properties can be saddening during divorce, but some losses can be mitigated if you take the right steps. The right step… involves paying no taxes or any other fees when you’re distributing child support, spousal support, or retirement accounts.
The use of QDRO ensures you don’t lose some significant aspects of your retirement savings to tax. It can only be possible when you know a great deal about QDRO and how it works, especially during or after divorce.
Life Without QDRO
If you distribute your assets, retirements accounts, pay child support or spousal support without a QDRO in place, it will attract a 10 percent tax charge.
Forbes gave an example of a man who withdrew $50,000 from his retirement to settle his wife. However, he got an unexpected tax bill of 10%, losing a whopping $5000.
The taxes were due to the lack of a QDRO, paving way for tax entities to regard the transaction as a non-qualified distribution.
Purpose of QDRO
With a QDRO, the account holder can make another party an authorized payee on the account. Thus, this person can receive funds as specified in the order. An instance is where the payee receives child support, spousal support, and asset division settlement, without any tax incurred.
The Internal Revenue Services made known that payment related to division settlement can trigger taxation, especially if the payee does not adequately reinvest the funds. However, the participant or account holder is not liable for any taxes.
By having a QDRO order in place, with your spouse registered as an authorized payee, you’re sure of not paying taxes. At least, for the main time.
Working with a lawyer
Your attorney will help you identify the plan name, including the plan administrator. It saves you the hurdles of mistake, as that often cost delay and even rejections. But with a QDRO attorney by your side, you’re sure to navigate this strenuous process without breaking down.
Also, your attorney will help you prepare a draft, typically five to eight pages, that’s assuming you and your spouse agree with the terms. After, your attorney will mail the draft to the Plan administrator for review and approval.
Your attorney will also guide you through all the processes, including court attendance and the confirmation of documents. If this is your first time, an attorney who is versed with the working of the legal system will ensure your interests are protected from start to finish. Feel free to give us a call 718-785-8017, or perhaps fill our contact form.