So, you’ve reached a settlement agreement with your spouse, and you’re now in the final stretch of divorce. Then your attorney or mediator leans over and says, “By the way, you will need a QDRO to split that account. And it is going to cost a little extra.” Wait, what? Are you serious? What even is a QDRO?”
A Specialized Retirement Tool
The QDRO is one of the last steps in your journey. Most divorces will require the use of a QDRO—an acronym for a legal document called a Qualified Domestic Relations Order. You will be required to have one anytime you split a Qualified Retirement Account. Qualified Retirement Accounts are typically plans that are held by an employer–401(k) plans and pensions.
There are a few other plans like 403(b) plans, 457 plans, and deferred compensation plans which may or may not technically be Qualified Retirement Accounts, depending on the plan itself, that can be split with a QDRO. And then to further complicate things, there are some company compensation plans that allow equity option awards, non-qualified and Restricted Stock Units, to be split using a QDRO.
What I am about to say is important. IRAs are not Qualified Retirement Accounts. Thus, you do not need to split an IRA with a QDRO. You can end up wasting your time, money, and you might even trigger some unintended tax consequences if you try to do so. To split an IRA, you will need to provide your divorce decree to the custodian—the investment company that holds the account. Some custodians may also request a Letter of Instruction that puts your request in writing or they may have a form for a transfer incident to divorce.
Back to Qualified Retirement Accounts. If the Qualified Retirement Account is not yours, you are the alternate payee. To assign all or a portion of the accounts to an alternate payee requires two things. First, the divorce decree must award you all or a part of the account. Second, you must complete and submit a QDRO to the plan provider.
Exceptions to the Rule
If your divorce decree awards you Qualified Retirement Account assets, you may have an incredible planning opportunity. This opportunity may allow you to take money out of that plan with zero penalties. Although you will still have to pay taxes on the money you withdraw, you will be exempt from the 10% penalty when you take money from a retirement plan before the age of 59 1/2. If you want to do this from a Qualified Retirement Plan, you must use a QDRO.
Gotchas
What is Counterbalance’s role with QDROs? We have a QDRO attorney that we work with that we have vetted. They are affordable and ethical. As your representative, we make sure that the attorney drafts the legal document according to your needs.
The drafting of QDROs can present several issues. Typically, these occur when the attorney or mediator fails to address the issues in the settlement negotiations. Here are a few problems that you should be on the lookout for when it comes to your QDRO.
- If you are the non-employee spouse, can you take the account as a lump sum settlement upon retirement?
- If your former spouse dies, will you still receive benefits?
- Did your former spouse have any outstanding loans on the account?
- If you are receiving part of a 401(k), what date will the split occur? Will the split include appreciation (or losses) and earnings after that date?
- If you are receiving a pension, will the plan allow an alternate payee to set up a separate account so that you can choose your own payout options and beneficiaries? If you can’t, are you from early-retirement penalties if your former spouse retires early?
