Financial Literacy, QDRO
QDRO’s In Divorce
Andrew Hatherley, CDFA®
August 31, 2018
Just when you think your divorce is just about over and you’ve reached a settlement agreement with your spouse, your attorney or mediator pipes up: “Now you will need to get a QDRO. It’s going to be an additional cost.”
What is a QDRO?
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. A Qualified Plan includes 401(k) plans, 403(b) plans, pensions, 457 plans, deferred compensation plans, and some RSU, restricted stock unit accounts. IRAs do not require a QDRO. Your divorce decree is all you need for an IRA division. In order to assign all or a portion of a Qualified Retirement account to a non-employee spouse, it has to be stated in the divorce decree. A second document, the QDRO, must be completed and submitted to the plan for the division to take place. HOWEVER, there is a little-known opportunity in divorce. If you are granted retirement assets from a former spouse via QDRO, you have ONE opportunity to take money out of that plan with zero penalties. It will be taxable income, but 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 do a QDRO.
In my practice, I facilitate the preparation of QDROs for my clients by acting as their representative to a QDRO attorney that I have vetted and found to be both affordable and ethical. Through this practice, I have become aware of the multitudes of pitfalls that QDROs present and the common 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?
“You want to ensure that the QDRO will be PRE-APPROVED by the plan if allowed to prevent rejection and the additional cost of re-doing it correctly.”
As you can see, the waters of a QDRO are fraught with peril and not for the inexperienced! Also, buyer beware! Prices for QDROs can range from $500 to $3,000 for the exact same document. Each plan has very specific requirements for the language of their QDROs and it is essential that the preparer has the plan documents in advance to ensure it will meet the requirements. You want to ensure that the QDRO will be PRE-APPROVED by the plan if allowed to prevent rejection and the additional cost of re-doing it correctly.
Once your decree is final, signed by the Judge, you submit the finished QDRO to the Judge. Once it is signed, then and only then, is it ready to submit to the plan. At that point, the plan will contact the non-employee spouse to get instructions for the disbursement or to identify the new account set up on their behalf.
QDROs are complicated. Be sure you have an expert that can guide you and make sure you don’t get taken advantage of by those that charge you exorbitant fees to prepare a QDRO. It just isn’t necessary.
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Certified Divorce Financial Analyst (CDFA®), Andrew Hatherley can help you to reach a workable resolution to your divorce so that you can get on with your new life and get started on your dreams.
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Andrew Hatherley is NOT AN ATTORNEY AND DOES NOT PROVIDE LEGAL ADVICE. All information he provides is financial in nature and should not be construed or relied upon as legal or tax advice. Individuals seeking legal or tax advice should solicit the counsel of competent legal or tax professionals knowledgeable about the divorce laws in their own geographical areas. Divorce planning is a fee-only process that does not involve investment advice or securities or insurance transactions.