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Understanding how to use a QDRO

Divorcing Wisconsin spouses who may need to split retirement accounts should learn about the qualified domestic relations order. As explained by the United States Department of Labor, a QDRO allows people to legally establish a second payee on some types of retirement accounts that are governed under the Employee Retirement Income Security Act of 1974. This allows that alternate payee to receive either a single distributeion or multiple distributions from that account just as the account owner would.

There are multiple benefits to a QDRO and a big one is the potential to avoid unnecessary early withdrawal fees or taxes. When an alternate payee is a former spouse, that person assumes tax liability for any distributions so that the account owner need not worry about these costs or loss of asset value. If the alternate payee spouse reinveststs the money into another qualifying retirement account, the early withdrawal penalties may still be avoided. Taxes would ultimately only be owed when retirement distributions are taken.

A qualified domestic relations order can also be used to allow an account owner to tap into retirement funds in order to pay spousal support or child support awards. Again, if the money is directed to a spouse for alimony, that recipient spouse assumes tax liability. If, however, the money is for a child support award and the dependent is the alternate payee, the account owner is liable for any taxes.

Forbes notes that all QDROs must be approved by the plan administrators before being finalized. This makes it important to start the QDRO process with sufficient time for this approval to be received.

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