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When you and your spouse divorce, your marital assets and debts will be divided between you. Often, the marital assets of greatest value are retirement plans, including pensions and profit-sharing plans such as 401(k)s. Unfortunately, dividing retirement assets is not usually as simple as transferring money from one account to another, or “cashing out” an account to give money to one’s spouse. The IRS typically sees such transactions as taxable early distributions, because money was moved from the retirement plan prematurely (i.e. before a certain age or retirement status occurred). The result of distributing money prematurely may subject the participant (not the recipient) to tax on the distribution, resulting in a large tax bill. Also, many pensions are not easily valued for distribution purposes, as they do not contain actual sums of money like savings accounts, but instead guarantee monthly retirement payments of an amount yet to be determined for an undetermined term of years.

So how do you transfer money from a retirement account to your spouse without running afoul of the IRS? How do you split a pension? The answer is by obtaining a “Qualified Domestic Relations Order,” or “QDRO” for short.

What is a QDRO?

A QDRO is simply a judgment, decree or order that creates or recognizes an alternate payee’s right to receive all or a portion of the payee’s retirement plan. “Payees” and “Alternate Payees” are usually divorcing spouses. The QDRO is not actually “Qualified” until approval by the administrator of the retirement plan. So, not only must a judge sign a QDRO, the retirement plan administrator must approve it. Then, and only then, may funds be transferred from the retirement account, or pension, to the other spouse, without incurring additional tax.

Not all retirement vehicles are transferred by means of a QDRO, however. Certain retirement plans, such as federal or state government pensions, military pensions, or church plans have their own methods for transferring benefits between spouses. Individual Retirement Accounts (IRAs) are usually transferred with a different order altogether.

If you are seeking a divorce and are worried about how your retirement accounts will be divided, Epperson Law Group, PLLC can help. Our divorce lawyers have helped clients in Charlotte, Weddington, Boone, and throughout North Carolina avoid tax penalties and long-term losses by accurately assessing and valuing their property, and guiding them through the process of dividing retirement accounts. To reserve a consultation, please call 704-321-0031 or fill out our contact form.