People in Illinois who are lucky enough to have a healthy retirement benefits package through their employer may not have thought about the rules and regulations governing the plan. Once divorce is on the horizon, though, it is essential to understand how property division may affect the account. According to The Motley Fool, the taxes and penalties could significantly reduce the value if the right steps are not taken.
With some types of plans, a couple can avoid these losses through completing a Qualified Domestic Relations Order. This court order gives the non-employee spouse the ability to roll his or her equitable share of the funds into a separate qualifying plan. A pension, 401(k) and 403(b) are examples of plans that qualify. There is a rule specific to divorce that governs the division of traditional IRAs and Roth IRAs.
Forbes magazine warns that the non-employee spouse should not wait until the end of the divorce process to complete a QDRO. The court order requires the split of the assets, but it does not trump the rules of the plan. So, a person who is expecting a lump sum from the account via the QDRO may discover that the plan does not allow for this type of withdrawal, and the result could spell financial disaster.
Even if the non-employee’s portion can be withdrawn rather than rolled over, the taxes and fees could reduce the value of the retirement account and make the property division unfair. If the QDRO comes after the divorce is finalized, though, it is too late to bargain for other assets to balance out the loss.