A qualified domestic relations order may help divorcing spouses in Arizona avoid some taxes and penalties when splitting retirement accounts.

When getting divorced, Arizona spouses may have a myriad of major financial decisions to make. Some amount of financial losses or challenges can be experienced when getting divorced as joint assets may be split in property division awards. On top of that, if one spouse is ordered to pay child support or spousal support, the financial hit of a divorce can leave a person facing a tough future.

These realities make it important for spouses to find every way possible to minimize unnecessary losses. The use of a
qualified domestic relations order may help in this effort.

What is a QDRO?

As explained by the Internal Revenue Service, a qualified domestic relations order is a legal order that allows a person other than the owner of a retirement plan to legally receive distributions from that account. This person may be the spouse or former spouse of the account owner or it may be the child or other dependent of the account owner.

The Balance indicates that a QDRO is not needed for every type of retirement account. Only those that are governed by the Employee Retirement Income Security Act of 1974 will need a QDRO.

Why does a QDRO matter?

There are two major benefits to a QDRO. The U.S. Department of Labor notes that one of these is the ability to tap into retirement funds to satisfy spousal or child support awards. The other benefit is a potential reduction or avoidance of taxes or penalties by the account owner when funds are distributed to a former spouse.

Typically, money is only allowed to be taken from these accounts for retirement purposes. All other distributions are generally subject to early withdrawal fees and taxes. When a QDRO is used and money is distributed to a spouse for either a property division or spousal support award, the receiving spouse becomes liable for any taxes or penalties.

It should be noted that these taxes and penalties may be avoided if the receiving spouse reinvests the money into a qualifying retirement account.

Money taken from a retirement account to pay child support would still be taxable to the plan owner.

How complicated is a QDRO?

A qualified domestic relations order must be carefully prepared. In addition, it must be approved by the plan administrator. Working with an attorney who is experienced in these special orders is always recommended so that spouses in Arizona can know their retirement assets are properly handled.