A common tool in divorce cases is the Qualified Domestic Relations Orders, better known as the QDRO
Without a QDRO, if the spouse with the defined contribution plan withdrew money to pay the non-employee spouse, he or she would be taxed on the withdrawal. Furthermore, if the employee had not yet reached retirement age (in most cases 59 and a half), he or she would also have to pay a 10% penalty.
For example, if a 401(k) worth $100,000 was supposed to be split in half by a 50-year old husband in a combined 30% state and federal tax bracket, it wouldn’t be fair to give $50,000 to his ex-wife. That’s because after paying taxes and the 10% early-withdrawal penalty he would only have $30,000 to give to his ex-wife. She would not be happy about that if she was expecting $50,000. However, if a QDRO was properly drafted and accepted by the plan administrator, the ex-wife could receive $50,000.
