The QDRO is one of last hurdles in your dissolution/divorce. 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 is. A Qualified Plan is typically a retirement plan being held by an employer. It might include a 401K or a 403b for example.
IRAs or, Individual Retirement Accounts do not require a QDRO.
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.
There are a number of pitfalls that QDROs present and failure of attorneys and mediators to address the issues in the settlement negotiations can create a real problem. Here is just a short list of some of the issues 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 QDROs are complicated. This is why in Collaborative Dissolution we utilize a professional known as a CDFA® Certified Divorce Financial Analyst. They are specifically trained in all things related to the finances of dissolution/divorce.
This is something you need to get right the first time. We have a number of CDFAs on our website. Even if you don’t choose to go the Collaborative route you NEED to hire one of our CDFAs to help make sense of the numbers of your divorce. I hope you do choose the Collaborative route. If you are looking to preserve the family unit and not fight through this process then give us a look.
This article was contributed by Donald Morris, financial advisor and CDFA®. Donald is currently serving as president of winwindivorce.org.