Many parties save for retirement but do not have liquid cash available. In situations where parties have monies in a 401(k) account, they may be able to remove said funds for use in a dissolution of marriage action. Some parties choose to take out a loan against a 401(k) to pay attorney’s fees and costs. However, in these situations there is an additional debt component that some parties would rather not have during a dissolution of marriage. Another option, if the plan allows it, is to do what is called a “Qualified Domestic Relations Order” to remove funds from a 401(k) account for use in a dissolution of marriage.
A “Qualified Domestic Relations Order” is also referred to as a “QDRO”. This is a specific, qualified, court order which provides that funds may be removed from a 401(k) or retirement account. In most scenarios, the early withdraw penalty that would normally be charged absent a QDRO will not apply to the parties, but the funds have to be awarded to the non-participant spouse, known as a the “alternate payee”. However, the parties are still on the hook for paying the taxes assessed pursuant to the withdrawal.
QDROs can be a very useful tool in dissolution of marriage proceedings. Other uses for the QDRO might be to remove funds to buy out another party’s share of another piece of property; of course, you can always just award more of the account to the other spouse in lieu of pulling the money out and paying the taxes on it, but parties won’t always agree to this because it places the tax burden on the receiving party. There are many different ways to utilize QDROs in a divorce, if allowed by the parties’ specific 401(k) plan or retirement plan.