As an employee who receives retirement benefits (such as a 401k or Pension), there are certain things you need to know about divorce and the division of retirement assets. Upon completing the divorce process, you may think that the divorce document (decree or judgment) stating that you will be awarded marital property helps in retirement benefits - but usually, it doesn’t. For most division or equalization of retirement accounts, you need a QDRO.
What's a QDRO?
A QDRO is the court order divorcees can use to divide their retirement plans. QDRO stands for "qualified domestic relations order," and it's commonly used to divide retirement plans between spouses. When a QDRO is properly used, you and your spouse can avoid tax penalties that usually are levied by the IRS when you withdraw from a retirement account before you reach retirement age. A QDRO can also be used in limited circumstances to collect/ pay alimony and child support.
How to Get a QDRO?
First, work with a professional who has expertise in preparing and filing these documents. Otherwise, you run risks like not being able to access the retirement funds if your QDRO is filed incorrectly. QDRO’s can be complicated and include terms like “pay on death beneficiary” and how the marital portion is calculated. If they are incorrectly prepared, you can lose a significant portion of what you would ordinarily be entitled to.
When to Think About Dividing Your Retirement for Divorce?
Start thinking about dividing retirement plans early in your divorce. It may be that you want to consider offsetting a retirement benefit against another account or asset. First thing to do is determine what retirement accounts actually exist. From there you can negotiate how they are allocated. Don’t forget to take into account that the value of a retirement account at the time of separation may be different than the value at divorce. Increases in the marital portion due to market improvements, should be considered as well for purposes of division and/or equalization.
During your divorce, you both will be required to complete financial disclosures that should include:
· Accurate retirement plan data
· Contact info of retirement plans for notification of payments of hold, adverse interests, etc.
· Statements from the financial institution that manages the retirement plan(s)
You may need additional information as well to determine your interest in a retirement plan and/or any separate property interests you may have.
How to Place a Hold on Retirement Plans
There are a couple ways to place a hold on retirement plans. Sometimes you can prepare a notice for the adverse interest before or just after your divorce begins. Contact the financial institution to find out if this will serve to ‘hold’ the funds (i.e. protect from any withdrawals without your consent). There is also a legal document you can often file and serve on the financial institution. Ultimately, it depends on the type of plan and where you file your divorce. Payment of Tax
QDRO's purpose is to allow nonmember spouses to pay the tax on the portion of benefits they receive instead of the employee spouse. With a valid QDRO, there won’t be any prepayment tax penalties - only ordinary income taxes.
Is a QDRO Necessary if the Retirement Benefits are Awarded to Participants?
The purpose of doing a QDRO is to assign a portion of a retirement account to the former partner. If you and your spouse have agreed that one party will keep the entirety of a retirement account, a QDRO is usually not necessary. However, it’s important to include a term in your divorce judgment and/or Marital Settlement Agreement, that clearly defines who will receive which account(s).
Keep in mind that if you fail to do your QDRO, there is no way you will receive the funds!
Due to this reason, it's vital to avoid delays when getting a QDRO.
Is It Possible for Same-Sex Spouses to Get a QDRO?
Absolutely. In fact, in these circumstances the parties may want to look beyond the date of marriage as the date when one party began earning a portion of the other party’s benefits. So, as an example, if the parties were in a committed ‘marital’ relationship before marriage was legal, they may want to adjust their calculations to account for all or part of the time they were together before the federal government recognized their union.
What if My Ex Spouse Won’t Sign a QDRO?
If your divorce judgment has terms regarding retirement division - either by agreement or court order, and your ex spouse refuses to sign a QDRO, you should seek legal guidance. A judge can still enter the QDRO but you must properly request it from the court. It’s sometimes a better idea to have your spouse sign a QDRO before the judgment is entered just to ensure that you get your fair share.
Need more information on QDRO's or other financial information during a divorce? Check out these 10 STEPS.