How do you spell divorce surprise? Q-D-R-O!
By Duncan E. White, Owner
Inkpointe Divorce Solutions, LLC
IRMO, SC – You’re in the final stretch of your divorce, you can see the finish line and you have reached a settlement agreement with your spouse. Then, your attorney turns to you and says, “Now you need a QDRO and that’s going to be an additional cost.”
Wait, what? Are you kidding? What the heck is a QDRO?
The QDRO is usually that last stop in the divorce process and most divorces will ultimately need one. QDRO is an acronym for a legal document called a Qualified Domestic Relations Order and is required whenever a divorcing couple needs to divide a Qualified Retirement Account. Let’s clarify exactly what that means. A Qualified Plan is typically one being held by an employer and includes 401(k) plans, 403(b) plans, pensions, 457 plans, deferred compensation plans, and some restricted stock unit accounts.
IRAs, or Individual Retirement Accounts, do not require a QDRO, although some companies are starting to ask for one. To take advantage of a little-known opportunity in divorce to avoid withdrawal penalties, even the IRA must use a QDRO. Legally, your divorce decree is all you need for an IRA division. For a Qualified Retirement Account, to assign all or a portion of the accounts to a non-employee spouse, it has to be stated in the divorce decree and then the second document, the QDRO, must be completed and submitted to the plan for the assets to be separated.
If you are granted retirement assets from a former spouse via QDRO, this is the point where you have ONE opportunity to take money out of that plan with zero penalties. It will be taxable income, but there will be no 10% penalty for the withdrawal before age 59 ½. If you want to be able to do this from an IRA, then you must use a QDRO.
During my time doing this work, I have become aware of the multitudes of pitfalls that QDROs present and oftentimes, the failure of attorneys and mediators to address the issues in the settlement negotiations. Here is just a short list of some of the subtleties often overlooked:
- Is the non-employee spouse eligible to receive a lump sum settlement upon retirement?
- If the employee spouse dies, will the non-employee spouse still receive benefits?
- Were any outstanding loan balances taken into consideration?
- If splitting a 401(k), what is the actual date of division? Will the earnings after that date be included?
- For pensions, does the plan set up a separate account for the non-employee spouse so they can choose their own payout options and beneficiaries? If not, have you protected the non-employee spouse from early-retirement penalties?
As you can see, the waters are fraught with peril and not for the inexperienced! Also, buyer beware! Prices for QDROs can range significantly!
Each plan has very specific requirements for the language of their QDROs and it is essential that the preparer have the plan documents in advance to ensure it will meet the requirements. You will want to ensure that the QDRO will be PRE-APPROVED by the plan, if allowed, to prevent rejection and more cost to re-do it correctly.
Once your decree is final and signed by the Judge, then you submit the finished QDRO to the court. Once it is signed, only then is it ready to submit to the plan. At that point, they will contact the non-employee spouse to get instructions for the disbursement or to identify the new account set up on their behalf.
This QDRO stuff is complicated. Be sure you have a knowledgeable professional that can guide you through it and make sure you don’t get taken advantage of by the sharks out there that know you need help.
If you need help finding the right professional with QDRO experience, contact us today. We’re on your side.
Duncan E. White is a Certified Divorce Financial Analyst (CDFA®) and has been a licensed financial advisor since 2010. He leads a Second Saturday Divorce Workshop each month for the benefit of those seeking information about the divorce process.
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Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. LPL Financial and Inkpointe Divorce Solutions do not offer tax, legal or mortgage lending services or advice.