People going through divorce in New Jersey are required to divide their marital assets according to a principle of equitable division, which attempts to divide property fairly – though not necessarily equally – between the divorcing spouses. While most people going into a divorce know that it will most likely involve the division of assets such as real estate and bank accounts, many do not realize that their retirement plans may also be divided with an ex-spouse, especially when divorcing later in life.
Tax Benefits of Using a QDRO
A QDRO, or qualified domestic relations order, is a legal document issued by a judge after a divorce or separation that allows one ex-spouse to receive a share of the other’s retirement plan as part of the distribution of marital property. By incorporating elements of both family law and tax law, a QDRO allows a divorcing couple to transfer part or all of a retirement account from one spouse to another while avoiding the negative tax consequences and early withdrawal penalties that would otherwise apply.
Unlike other many other types of property division that occur during divorce, a QDRO does not require immediate payment by one spouse to another. Instead, the recipient ex-spouse, called an “alternate payee,” can make withdrawals directly from the retirement account when the benefits become available. The alternate payee will be taxed on the benefits at the time of withdrawal, but the funds generally will not be subject to the 10 percent early distribution tax that normally applies. A QDRO can also be structured to prevent the alternate payee from benefitting from future payments made by or on behalf of the owner of the account after the divorce.
Get Legal Help
As the name implies, not every domestic relations order is a qualified domestic relations order that provides special tax benefits. There are many different types of domestic relations orders that may be involved in a divorce, such as orders for alimony or child support, and only those that meet the strict legal requirements of a QDRO can provide the benefits described above. To learn more about using a QDRO to structure your divorce settlement in the most advantageous way possible, talk to an experienced divorce lawyer in your area.