When Connecticut residents begin building up their retirement accounts at work, they're probably aware that there is a pretty hefty penalty for withdrawing money from it prior to retirement. During a divorce, retirement accounts, or at least a portion of them, could be considered part of the marital estate. Dividing those accounts could lead to a significant financial impact if not done correctly.
When Connecticut couples attempt to create their own divorce settlements without the benefit of the right advice, they may split their retirement accounts thinking that they will just have to deal with the early withdrawal penalties. Those who opt to get professional assistance, however, will discover that if they obtain a qualified domestic relations order, they do not have to worry about those penalties. The QDRO, as it is more commonly referred to, lets the retirement plan's administrator and the IRS know that the distribution is subject to a court order in a divorce, which creates an exception regarding taxes and penalties.
Specific information is required in order to ensure that the order is valid. In addition, every plan is unique, so it would be a good idea to confer with the administrator before obtaining the QDRO. Otherwise, the order may not do its job as intended.
Working together to come to an amicable divorce settlement is a good idea, but that does not mean that couples should forgo obtaining assistance to ensure that the settlement adheres to current law, and that all other legalities are covered. What many people believe they save by doing their divorces themselves could backfire. For instance, without knowing that a QDRO is needed to distribute funds from retirement accounts without incurring significant tax ramifications, could end up costing even more in the future.
Source: Forbes, "IRA Withdrawal Penalty A Cost Of Do-It-Yourself Divorce", Peter J. Reilly, June 30, 2017