If you are considering a divorce in New Jersey and either you or your spouse have savings in an employer-sponsored retirement account like a 401K, you will want to learn about the qualified domestic relations order. Beware of proceeding down the path of simply relying on your court-issued divorce decree when splitting these assets as part of your property division settlement. Doing so is likely to leave you paying out large sums of money in the way of taxes and early withdrawal penalties. A QDRO can help you avoid both of these things.
The United States Department of Labor explains that because a 401K is intended to force long-term retirement savings, any early and non-retirement withdrawals will be subject to penalties and fees. These can eat up a lot of your savings. In addition, such withdrawals are subject to income tax. With a QDRO, your former spouse can be named as an authorized payee on your account so that if they are to receive some of the money in the account, that money can be paid directly to them. From a tax perspective, you have no liability as you have not received any money. If your spouse puts the money into another account, they may also avoid taxation.
The early withdrawal fees are also avoided as the QDRO outlines the terms of the payment. Your plan administrator is also involved in the approval of the transaction.
If you would like to learn more about what you need to consider when determining your property division settlement in a divorce, please feel free to visit the qualified domestic relations order page of our New Jersey family law website.