In many divorce proceedings, a large portion of the marital assets are in the form of retirement accounts, including defined benefit and defined contribution plans. Dividing a retirement account in a divorce is not accomplished merely by indicating in a Marriage Settlement Agreement how the account is to be divided. Rather, in the case of most retirement accounts, a Qualified Domestic Relations Order (QDRO) must also be drafted in order to properly divide the account.
A QDRO is essentially a Court Order which tells the holder of retirement funds, known as the plan administrator, how those funds are to be divided as a result of a divorce. In the case of a defined benefit pension, in which payments are received in the form of annuity upon attaining retirement age, the QDRO tells the Plan Administrator how to divide the future payments.
Defined Contribution Plan
In the case of a defined contribution plan, the QDRO tells the plan administrator how to divide the funds in the plan. The party receiving the funds, known as the alternate payee, will receive the funds in an account in his or her name as soon as the QDRO is processed. At that point in time, the party can either withdraw the funds in cash or roll them over to an Individual Retirement Account (IRA).
If the funds are cashed out, most plans require a mandatory 20% federal tax withholding but there is no early withdrawal penalty due to the completion of the QDRO. If the funds are rolled over into an IRA, there are no income tax implications until the funds are withdrawn.
However, if the party rolls the funds over into an IRA, they should not cash the funds out until they reach age 59 and 1/2, because the early withdrawal penalty will once again apply after the rollover occurs.
It is also important to note that if the funds being transferred pursuant to a QDRO are in an IRA, the 10% early withdrawal penalty cannot be avoided.
Call Trinity Law for Assistance with your Divorce
If you have a divorce case that involves retirement assets, you should seek legal counsel. Qualified Domestic Relations Orders are quite complex and involve complicated income tax rules, so it is important to discuss the matter with an attorney. If you need advice in this area, contact one of the experienced family law attorneys at Trinity Law today at 717-843-8046. Our attorneys routinely handle Pennsylvania family law matters in York, Lancaster, and surrounding counties.