Call Now To Schedule A Consultation
703-883-8035
Maddox & Gerock, P.C.

What do ERISA, QDROs and taxes have in common?

No one expects to have to draw from their retirement account early. It’s supposed to be there for later, for retirement, but when you get a divorce that plan may change.

While you may know withdrawing from your retirement account comes with a tax penalty, you may not know that your former spouse is likely entitled to a portion of your retirement account in the event of a divorce. As such, it appears as though you will end up making an early withdrawal after all. Is there a way around paying the tax penalty? Will you owe taxes on the distribution amount?

Why a qualified domestic relations order?

If your retirement account falls under the Employee Retirement Income Security Act of 1974, or ERISA, then you will need a qualified domestic relations order signed by the Virginia judge presiding over your case in order to avoid paying any penalties or taxes associated with the withdrawal for your former spouse. Under ERISA rules, your plan's administrator will not make a distribution to anyone other than you without a QDRO because you cannot give anyone a stake in your plan without it. This order allows the distribution ordered in your divorce to happen and to happen without the tax penalties ordinarily associated with an early withdrawal.

What does a QDRO do?

As stated above, a QDRO allows for the transfer of funds in a participant’s retirement plan to the participant’s former spouse. A QDRO accomplishes the following:

  • If the plan allows, the ability of your former spouse to receive death benefits from your retirement plan.
  • Allows for the transfer of retirement funds to your former spouse without tax or tax penalties.

Once a QDRO is entered and the funds are transferred to your spouse, then to the extent your former spouse makes any withdrawals from his/her share of those funds, then the former spouse is responsible for paying income taxes or penalties, if applicable.

To state it plainly, you are not responsible for any taxes associated with the distribution that is made from your retirement plan to your former spouse pursuant to a QDRO as part of the divorce.

How to do it right?

It may sound easy enough, but you could easily make a mistake and undo what you were trying to do if you fail to make sure the QDRO is properly constructed. The law requires specific information in a QDRO, and without it, the IRS and/or a court could rule it invalid. Moreover, your plan's administrator may have certain requirements as well in order to honor the QDRO.

It is therefore important to work with an experienced attorney to properly draft a QDRO and work with the plan administrator to obtain all relevant information regarding the terms of the retirement plan.

No Comments

Leave a comment
Comment Information
Email us for a response

Need Help? Contact Our Attorneys

Bold labels are required.

Contact Information
disclaimer.

The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.

close

Privacy Policy

Office Location:

Maddox & Gerock, P.C.
8111 Gatehouse Road
Suite 410
Falls Church, VA 22042

Phone: 703-239-7006
Phone: 703-883-8035
Fax: 703-356-6120
Map & Directions
Falls Church Law Office Map

Contact US: