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Don't forget about retirement plans in your divorce settlement

You may already feel as though you are living in chaos as you progress through the divorce process. Your future remains uncertain, and you struggle to figure out which way to turn. Even in an amicable divorce, the emotional and physical changes happening are often unnerving.

In this state, you may forget to address certain issues such as what happens to the retirement plan one of you has through your employment. This account often represents one of the largest assets of a couple, along with the family home. As you enter into negotiations regarding your property settlement, the plan may require division as well. Simply dividing it up is not enough, however.

What is a QDRO?

You probably already know that early withdrawals from an employment retirement plan come with a significant tax penalty. Fortunately, you can avoid this penalty with a qualified domestic relations order. This court order allows the division of a retirement account without that concern.

States like North Carolina understand that this asset can be part of the marital estate and, thus, subject to division. It wouldn't be appropriate for the tax penalty to apply when the division of the retirement account is subject to a court order. Therefore, you can request a QDRO from the court to keep you from worrying about that tax penalty.

You may want to consult with the plan administrator of your retirement plan to determine whether any specific information goes into the QDRO. The administrator may respond by sending you its version of the order. It may be tempting just to use it, but instead, you may want to review it first to ensure you aren't giving up any important rights along with it.

What goes into a QDRO?

Obviously, the order needs to specifically identify the plan, the participant and the recipient. It may require other information and provisions as well, including how you would like to receive the funds. You generally have three options as follows:

  • You could receive a one-time cash payment.
  • You could roll your portion of the funds into another qualifying account.
  • You could leave your portion of the funds in the account and wait until retirement age to collect.

Determining which option will best serve your interests may require some research into your current and future financial requirements. Whatever you decide, you need to ensure you receive a QDRO to protect yourself and to avoid the tax ramifications of early withdrawal.

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The Law Office of L. Bryan Smith, P.C.
3965 Market Street
Wilmington, NC 28403

Toll Free: 877-231-9829
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