Virginia residents getting divorced should understand the potential tax implications of various aspects of their divorce settlements.
Couples in Virginia understand that loss is a part of getting divorced. The losses that can be experienced touch virtually every part of life from the emotional to the financial. On the financial end, there are some ways to guard against some losses and save more assets for future needs. A Qualified Domestic Relations Order is one way of doing just this.
When should a QDRO be used?
When one spouse needs to take money from a company-sponsored retirement account like a 401(K) for divorce payment purposes, a Qualified Domestic Relations Order should be used.
The U.S. Department of Labor explains that when a retirement account is created, it is setup for a sole person even if that person is married at the time. In most cases, distributions can only be taken from these accounts when the account holder meets all of the stipulated criteria for retirement. Distributions taken for any other reason can be subject to taxes and even early withdrawal penalties.
A Qualified Domestic Relations Order bridges the gap in a way by letting tax entities know that certain distributions are taken as part of a marital dissolution agreement. This can be done when 401(K) funds are needed to pay a property division settlement, child support or even spousal support according to the Internal Revenue Service.
How does a QDRO work?
When a QDRO is created, it identifies another person as an authorized payee on the 401(K) account. It should outline in very detailed form exactly how much money is to be paid to that person, how often and on what specific dates payments are to be made. This can be for a one-time payment or a set of payments over time.
If payments from a retirement account are to satisfy an award for support, there will be no taxes assessed to any party. When payments from a retirement account are made to satisfy an asset division settlement, the person receiving the money may be liable for taxes. This, however, can be avoided by simply reinvesting the money into a qualifying retirement account. With a QDRO in place, the account holder will have no liability for taxes even if the recipient fails to reinvest the funds.
An example of what can happen
The high price of life without a QDRO can be seen in a case reported by Forbes. A man, following the recommendation of a judge, took money from his retirement fund to pay his ex-wife. There was no Qualified Domestic Relations Order filed in the case. For this reason, he received a tax bill amounting to ten percent of the money he paid to his former spouse.
How can Virginia spouses get help?
As soon as a divorce is initiated or even discussed, talking to an experienced family law judge in Virginia is advised. There are many details in the law that can make a significant difference to people down the road and an attorney can guide people through those.