What if I give my ex half of my retirement account without a QDRO?

It is understandable when parties going through a divorce look for ways to cut corners and save a few dollars. After all, divorce is an expensive proposition under even the best of circumstances. So it is not surprising that, when retirement accounts need to be divided, the spouses try and avoid having to pay for the expense of a Qualified Domestic Relations Order (QDRO).

After all, from the plan participant’s perspective, if his or her soon-to-be ex is going to get half anyway, why not just withdraw that money and hand it over directly? This would save the cost of preparing the #QDRO and happen faster anyway. Right?

As appealing as that solution seems, it is a mistake, especially for the plan participant.

If a retirement account is “divided” without a QDRO, then the money withdrawn is treated as a taxable distribution to the plan participant. He or she will owe the IRS money that actually ends up going to the ex, who receives a tax-free windfall. Plus, the plan participant may get hit with an additional 10% early withdrawal penalty if he or she is younger than 59 ?.

To avoid these tax penalties on the withdrawal, a QDRO must be used. That way, the division is tax-free to the plan participant and also to the alternate payee (presuming he or she rolls the full amount over into a new retirement account).

To learn more about QDROs or the many related services we provide, please visit our website.