A QDRO can help you avoid tax problems in the future. Typically, when a spouse withdraws from a retirement account without a QDRO, they will have to pay taxes on the withdrawals and may also face a 10% penalty for doing so.
This is why getting professional assistance from a QDRO specialist can be a worthwhile investment.
What is a QDRO?
Divorcing couples can use a QDRO to divide certain types of retirement accounts, including 401(k)s. This specific court order is often required to ensure that the assets in a partner’s retirement account are equitably divided during divorce proceedings.
Depending on the type of pension plan involved, there may be strict rules that dictate how benefits can be paid to an alternate payee. For example, some defined benefit plans limit the amount of survivor benefits that can be paid to a former spouse.
It’s important for divorcing parties to include enough details in their Separation Agreement so that the QDRO they draft passes muster with the pension plan. Failure to do so can result in delays and may even make it impossible for the QDRO to be approved by the plan provider. As such, it’s best to enlist the assistance of a skilled QDRO specialist rather than attempt to prepare this document on your own.
How does a QDRO work?
It’s important to file a QDRO in order to ensure that you are getting your fair share of retirement assets. If you don’t, the participant may be able to designate someone else as their beneficiary and your share of the account could be lost. There are many potential complications that can arise without a QDRO, and the longer you wait to file one, the more expensive it will be.
A QDRO can be used to divide a 401(k), 403(b), or 457 plan; defined benefit plans, such as pensions; employee stock ownership plans (ESOPs); and IRA accounts. A QDRO can name either a specific dollar amount or a percentage of a plan to be paid to the non-participant spouse, who is then allowed to withdraw those funds at their own discretion. This is in contrast to a traditional distribution from a retirement account, which is taxed as income when withdrawn. The QDRO also avoids the 10% early withdrawal penalty.
How can a QDRO affect my divorce case?
A QDRO can make your divorce case much smoother and clearer. If you and your spouse agree on how the retirement assets will be divided, you can move forward with your divorce knowing that there are no misunderstandings about your finances.
Similarly, it is important to have the QDRO drafted before your final hearing or trial so that it can be reviewed and processed in time for your judge to sign it by the end of your divorce case. This can prevent problems after your divorce when the former spouse realizes that they didn’t get what they deserved in the divorce settlement.
Also, without a QDRO, your ex could be penalized by the IRS when they withdraw funds from a pre-tax retirement account (like a 401k or 403b) because it would be considered an early withdrawal and subject to taxes and penalties. A QDRO will ensure that the proper tax rules are followed for both parties.
How do I get a QDRO?
Many divorce attorneys are reluctant to push their clients toward getting a QDRO. It can be time consuming and complicated. It also requires the expertise of an actuary or a company that specializes in this area. In addition, a QDRO can cost anywhere from a few hundred dollars to the low thousands.
As a result, some former spouses will procrastinate. But this can lead to serious problems down the road. We regularly hear from former spouses who get a phone call a decade or more after their divorce, and realize they never got the pension payments they expected to receive.
Preparing a QDRO is often less about family law and more about interpreting federal laws, like the Employee Retirement Income Security Act (ERISA), and understanding the unique rules that dictate each plan. As a result, it’s often best to leave this important paperwork to the professionals. A good QDRO specialist will charge a small fee – which is still much cheaper than missing out on valuable retirement funds.
