A QDRO can help you prevent financial loss

With a qualified domestic relations order, divorcing spouses may be able to avoid penalties and taxes when splitting 401K accounts.

For divorcing husbands and wives in Texas, concerns about the financial losses they will face when they end their marriage can be real. From splitting assets to readjusting to the fact that living alone costs more than living with someone else, the financial stings are felt in many ways.

When it comes to 401K accounts, nobody finds it easy to see large sums of their hard-earned retirement savings gone in a moment. While it may not be possible to salvage all of a person's 401K account in a divorce, there is a way that people can prevent some loss of assets here. This can be done by using a qualified domestic relations order.

What does a qualified domestic relations order do?

The United States Department of Labor explains that a QDRO allows an additional person to be named as an alternate payee on one spouse's 401K account . This alternate payee may be the account owner's spouse or former spouse. It may also be the account owner's child or dependent.

Why do I need a QDRO?

People who split 401K accounts as part of their property division settlement should always use a QDRO. Without one, the account owner will be forced to take a distribution and then pay the other spouse. If the account owner is not of retirement age, they will be forced to pay early withdrawal fees. This will eat into whatever is left for that person.

On top of the penalty, the account owner will be hit with income tax on the distributed money. MarketWatch adds that depending upon the person's situation, this additional income may even catapult them into a higher tax bracket overall further increasing the negative tax implications.

With a QDRO securely in place, money is paid to the other spouse. This ensures the account owner has no tax or penalty problems going forward.

Are there other times I might use a QDRO?

A qualified domestic relations order may also be used to allow a person to take money from a 401K account to make spousal support or child support payments. If money is used for spousal support awards, it is once again the spouse who receives the money who is responsible for income tax. If the money is used for child support, it is the account owner who is responsible for taxes as this is consistent with any money paid for this purpose.

How can I make sure my QDRO is valid?

When in need of a QDRO, Texas spouses should always consult an attorney. Working with a professional is the best way to make sure these legal documents are properly prepared.