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The impact of divorce on retirement plans

During a divorce proceeding many issues may surface. Those issues pertaining to marital assets may become quite complex. Many divorcing couples might be under the wrong impression that their soon-to-be ex-spouse cannot access their retirement plans; however, the reality is far from it. Depending on the specific situation, the type of retirement plan and the structure of its related benefits, the plan owner may find themselves in a situation where their spouse or soon to be ex-spouse are legally granted a portion of the value of that retirement plan.

In some instances they may also be granted instant access to their portion rather than at some future point in time which usually coincides with either the plans owner's retirement or their death. In order for an ex-spouse to claim the portion of a retirement plan that they are legally entitled to, they are typically required by the plan's administrator to file a Qualified Domestic Relations Order.

A QDRO is essentially a judgment, decree or order for a retirement plan to pay either child support or alimony. It can also be used to collect on marital property rights for a spouse, former spouse, child or any other dependent of the plan's participant.

In order for the QDRO to be legally valid it must contain the plan's participant and each alternate payee's name and last known mailing address. It must also list either the exact amount that the listed alternate payee is owed or the percentage of the total that alternate payee is entitled to.

It is important to note that once a QDRO benefit is paid out, the recipient of that benefit must report any payments paid out under the QDRO as though the recipient themselves were a participant in that plan. Thus all applicable tax rules will apply to that payout.

Source: IRS, "Retirement Topics - Divorce," Accessed Feb. 3, 2015

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