In New Jersey, as in other states, the division of retirement funds—such as pensions, 401(k)s, and other retirement plans—requires a legal document known as a Qualified Domestic Relations Order (QDRO). Understanding what a QDRO is, why it’s essential, and how it impacts retirement assets can affect the financial future of both spouses after divorce.
A QDRO is a court order that provides instructions for the division of a retirement plan during a divorce. It ensures that one spouse receives their marital share of the other spouse’s retirement benefits.
The QDRO sets forth how retirement benefits will be split and allows for the transfer of funds without incurring early withdrawal penalties or unwanted tax consequences. Without a properly executed QDRO, a spouse who receives a portion of the other’s retirement assets could face substantial penalties for early withdrawal. Typically, retirement plan distributions are taxed as income and subject to a penalty if taken before the age of 59½. A QDRO permits the direct transfer of retirement funds to the non-employee spouse without triggering these penalties.
A QDRO ensures that the spouse receiving a portion of the retirement benefits receives the correct amount, whether it’s a fixed percentage of the account balance or a set dollar amount. The QDRO specifies how the assets will be divided, including any provisions for future increases in account value (e.g., contributions, gains, or interest) after the divorce.
Once a QDRO is in place, it gives the non-employee spouse a legal claim to the funds in the retirement account. This means that the spouse who originally earned the retirement benefits cannot access the portion designated for the other party. Essentially, the QDRO protects the recipient's rights to those assets, even if the account holder tries to make changes to the plan or deplete the funds. However, it is important to understand that as the recipient, you will not receive the funds until the time your spouse retires.
Given the complexity of retirement asset division, consulting with qualified legal counsel, such as the family law team at Cohn Lifland, to discuss further the importance of a QDRO in your divorce can provide you with the knowledge and financial security, ensuring that the retirement assets in your marriage will be divided fairly and in accordance with the law.