What’s Involved With A Qdro And How Do You Get One
The contents of your QDRO will depend on the requirements of the particular pension plan. Plan administrators often provide a sample document, but that will have to be adapted to address the facts of your case.
There are some basic elements to any QDRO, however. Federal law ) requires that for a QDRO to be valid, it must clearly state all of the following:
- the name and the last known mailing address of the spouse who participates in the plan, as well as the name and mailing address of each alternate payee covered by the order
- the amount or percentage of the participant’s benefits to be paid by the plan to each alternate payee, or the method for determining that amount or percentage
- the number of payments or the period to which the order applies, and
- each plan to which the order applies.
There are also rules on what else a QDRO must include and what it may not require the plan to do. Because these orders can be quite lengthy and complicated, there are lawyers and other experts who specialize in preparing these documents. In the interest of accuracy and saving time , most spouses or their lawyers prefer to have these specialists work with the plan administrator and prepare the order.
The U.S. Department of Labor provides an online publication that explains QDRO’s in detail.
Is A Retirement Account Considered Separate Property
Assets that are earned during the marriage are considered marital property. Anything added to a retirement plan after marriage will not be regarded as separate property and may be divided between both parties. In some states, this means they will be split 50/50, and in others, the courts will decide how to fairly divide the retirement plan based on factors like age, work history, health, etc.
What Type Of Retirement Account Do You Have
How a judge decides to split a retirement account depends on the type of account in question. Most retirement plans are defined contribution plans or defined benefit plans. In the first type, the individual or employee contributes a set amount to the retirement savings account. The employer may match contributions up to a maximum. Examples of this type of plan are a 401 and pension plan. In a defined benefit plan, the amount the employee or person receives is calculated based on the length of time worked and the salary earned at the time of retirement.
When dividing a defined contribution retirement account in a divorce case, the courts in Colorado will require the spouse with the plan to transfer part of the value of the plan at the time of the divorce to the other spouse in the form of an IRA or similar retirement account. This transfer will not be taxed. When dividing a defined benefit retirement account, the courts will first determine the value of the benefit accumulated during the length of the marriage.
Then, an amount that is deemed appropriate will be given to the other spouse only after the owner of the account retires. This is known as deferred distribution. Typically, a spouse is entitled to about 50 percent of a retirement account, although this can change depending on the case. The division of retirement accounts during a divorce is a complicated issue that typically requires professional accountants and financial experts.
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Division Of Retirement In A Missouri Divorce
When a marriage is ending, the division of assets acquired during the marriage is subject to equitable distribution. This includes most types of retirement accounts and retirement investments. If these assets are not carefully protected, your rights to them may be negatively affected.
Protecting your retirement rights is crucial to your financial health moving forward after your divorce. With the help of an experienced Missouri divorce lawyer, you can feel confident that your rights and financial freedoms are protected.
Does A Retirement Account Only Belong To The Person Whose Name Is On It
Imagine that only one spouse worked for most of the marriage while the other cared for the kids. If that’s the case, most of the retirement assets are likely only in one spouse’s name. It is common for clients who own retirement accounts to believe that they are entitled to the entire account since it’s in their name. However, money earned during the marriage is a marital asset and subject to division in a divorce.
In contrast, retirement assets earned prior to the marriage are typically considered separate assets and not subject to division in the divorce. In addition, the growth on those separate assets during the marriage is considered separate property. For an accurate appraisal of what portion of a retirement account is we can provide you with a separate property tracing. The burden of proof is on the person making the separate property claim.
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Free Financial Steps To Consider Before Divorce
Before you think about the divorce decree, you may want to meet with one of these professionals:
- Retirement and savings plan financial advisor
It is essential to review your:
- Roth IRA and individual retirement account
- Life insurance policies
- Court orders related to a former spouse or child support
- Legal documents such as wills and prenuptial agreements
Gathering most of this information is free. A divorce attorney can also review your retirement planning and offer you legal advice on your retirement account balances and the divorce agreement.
Happily Married Maybe Plan Ahead Anyway
If you think your relationship can survive a discussion like this, consider talking about how you would divide your assets, should you ever need to. One way to settle these issues is to create a postnuptial agreement. These are enforceable in most places but should be done carefully to fit your states lawsand some states may not accept them. Use an attorney to make sure that it works.
If you are still at the planning-to-get-married stage, a prenuptial agreement may be the most straightforward way to protect your retirement assets if you eventually split up. Just be sure to include plans for how these assets can be divided, and leave some room for adjustments that could benefit you both depending upon your circumstances at the time of divorce. Prenups are especially useful if one or both of you has children from a previous marriage or relationship.
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Property Brought Into The Marriage
As long as the property has been kept separate during the course of the marriage and has not been paid for/maintained/improved upon with marital funds, this could be kept separate. If you have been married for a long time, do not expect to receive any marital property that you brought into the marriage. The longer your marriage, the more likely the court is to see any property brought into the marriage as irrelevant. Cases like this are more likely to see marital property as all-inclusive.
Things To Watch Out For
For the recipient of the 401 funds, it’s important that you do not agree to a change of beneficiary before the divorce is final. As long as you remain married, account owners cannot name anyone other than a spouse without your approval, Zuraw said.
The reason this matters is that if your soon-to-be ex passes away before the divorce is final, you might no longer have any rights to the 401.
Additionally, make sure that if the intent is for each spouse to get, say, 50 percent of the 401 assets, the divorce decree and QDRO state that percentage instead of a fixed amount.
Here’s why: Say there’s $100,000 in the 401 and the non-account-owner is to receive 50 percent. If the QDRO states the receiving spouse should get $50,000 which represented 50 percent at the time it was written and the account posts gains or losses before the transfer is made, $50,000 no longer represents 50 percent.
Also, be aware that if you are headed for bankruptcy, assets in 401s are protected in that process, while IRAs are fair game for creditors. If this is your situation, consider leaving your share in the 401 plan .
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Is A Retirement Plan More Or Less Valuable When Compared To Other Assets
Retirement assets are only one part of a familys total financial picture. The keys to starting a new financial life beyond divorce include liquidity, expense reduction, and tax avoidance. A divorce financial professional can help clients rate each asset for liquidity and tax consequences to better suit financial goals and priorities. They will also prepare income and expense projections to see how long the clients resources will last.
Most retirement plans rank lower than other assets because withdrawals are taxed at the owners highest marginal tax rate and incur a 10% penalty until age 59.5 .
What about the sale of a home? Assuming there is a market for the residence, home sale proceeds nearly always rank high on the list of desirable assets. Usually, a large share of the gain from the sale of a primary residence is not taxed and, unlike most retirement plans, these proceeds are available to divorcing clients before age 59.5 without penalty. By comparison, keeping an unaffordable house greatly diminishes liquidity and may result in a forced a sale at a lower, fire-sale price.
Cash savings and checking accounts are, obviously, the most liquid. Brokerage and investment accounts rank in-between home sale proceeds and most retirement accounts because they are available for withdrawal and only the investment gains are taxed. Missing the tax impact of selling long-term investments in a taxable non-retirement account can result in an unequitable division.
How To Divide Retirement Plan Assets In A Divorce
For many people, retirement plan assets make up a meaningful portion of their financial wealth. In a divorce proceeding, retirement plans often present additional challenges to an already difficult process.
Most states treat retirement plan assets as marital property. Therefore, unless youre operating under a prenuptial agreement, youre legally entitled to a portion of your spouses employer-sponsored retirement plan benefits, and vice versa. Since retirement plans can be of significant value and often come with important tax implications, its critical to understand how they are divided in a divorce so that your interests are protected.
I sat down with Casimira Pittman, CPA, senior management at Smith and Howard, to find out more about the division of retirement plan assets in a divorce. She shared the following information with me, to help explain how retirement plan assets are divided in a divorce.
Qualified Domestic Relations Order
Defined Contribution Plans
A 401 is the most common example of a defined contribution plan. Determining the value of a defined contribution plan is relatively straightforward since it has a daily cash value, or balance. A defined contribution plan can be divided however the court deems appropriate with a QDRO.
Defined Benefit Plans
Like a defined contribution plan, a defined benefit plan can be divided however the court deems appropriate with a QDRO. In general, three common methods are used to divide pension assets:
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Defined Contribution Plans 401 & 403
These retirement plans require employees to contribute a fixed portion of their paycheck.
- 401 plansThese are employer-sponsored retirement accounts that dedicate a portion of the employees pre-tax salary to a retirement account
- 403 and TSA plansA 403 is an example of a tax-sheltered annuity plan. They allow certain employees of public schools and tax-exempt organizations to save for retirement through contributions from both employers and employees.
- IRAs IRAs, Roth IRAs, and SEP IRAs are three types of similar retirement accounts. Traditional IRAs allow employees to pre-tax their income, which allows for an upfront tax break. Roth IRAs work in reverse, meaning the employee will not receive any upfront tax deductions, instead they will receive a tax break later meaning any money withdrawn will be tax-free. SEP Plans allow self-employed individuals to provide a basic retirement plan for themselves and any of their employees. Like the traditional IRA, employers can take a tax deduction for their contributions to an SEP IRA.
Questions About Divorce And Retirement Accounts Let Us Help
Retirement accounts are complicated, especially in divorce. Understanding tax implications and liquidity are critical in divorce negotiations. Ensure you are receiving the settlement thats best for you by having the right people on your team.
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Leah Hadley
Founder
I’ve been where you are today. Whether you are going through your own divorce or sharing information with a loved one, I’ve been there. I divorced after ten years of marriage and at the time, I had three young children . I also experienced the divorce of my own parents when I was 8 years old. Now remarried and dealing with the everyday challenges of co-parenting, I am passionate about making the divorce process as painless as possible for the whole family.
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How Will We Be Taxed If We Divide A Retirement Account
You are not necessarily taxed on the division of retirement accounts. Each plan or account has different requirements to divide it tax-free. For example, a qualified retirement plan such as a 401-K governed by the Employee Retirement Income Security Act will require a Qualified Domestic Relations Order to divide the investments in the account.
Other retirement plans, such as many traditional IRAs or Roth IRAs, may not require a QDRO. Many of these plans require a copy of the divorce decree and custodian-specific forms to divide the account. Contact the custodian if you are not sure what is required.
Can Retirement Accounts In Divorce Be Divided Without Triggering Taxes
A tax-free division is possible, but each plan or account has different requirements. Without the right process, clients may be subject to significant taxes, penalties, expenses and ultimately an un-equitable division.
While the division of marital property is generally governed by state domestic relations law, any assignments of qualified retirement interests for example, a 401 plan or pension plan must also comply with Federal law, namely the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986 .
The most common error that triggers taxes is a withdrawal of account resources before age 59.5. With limited exceptions, the withdrawal incurs taxes and a 10% penalty. Because tax rules and the process of dividing accounts can change, you should consult with a financial and/or tax advisor who specializes in divorce issues to ensure your information is current.
An employer provided qualified retirement plan will require a Qualified Domestic Relations Order to divide the investments in the account. If prepared properly, the QDRO outlines every detail of the split so the plan administrator can complete the transaction accurately.
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Consult A Missouri Divorce Attorney
Division of retirement assets is important to the parties, all of whom want to protect their financial interests. Retirement account division can be complex, but with the help of an experienced Missouri divorce attorney like Joshua Wilson, you can be assured you are following the law and protecting your finances.
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Protecting Your Retirement Accounts During And After Divorce
The primary thing you must remember is that retirement accounts are not fixed entities. They keep growing even after you get divorced. If you get divorced, you will most likely have to pay your spouse a portion of your retirement accounts and pensions.
So the goal of this article isnt to help you figure out how to avoid paying anything. Thats possible, but probably not realistic in most cases. The goal is to minimize the effect of your divorce on what remains of your retirement accounts afterward, and keep it secure as you move forward.
Here are 7 things high net worth individuals can do to protect their retirement accounts during a divorce.
1. Get a QDRO Qualified Domestic Relations Order
A QDRO is, according to the IRS, a judgment, decree, or order that a retirement plan must pay child support, alimony, or marital property rights to a spouse, former spouse, child, or other dependent.
The QDRO spells out who will be paid from each retirement account, how much, and how many payments are required.
You need a tax lawyer and a financial advisor to help you work through your divorce, and this is one reason why. Your divorce lawyer doesnt have the expertise for this sort of thing, and isnt required by law to mention it.
Dont go there.
Find a high net worth financial advisory specialist , and ask them to help you create a QDRO.
2. Know the Rules of Your Retirement Accounts
The great challenge with QDROs is that every retirement account has different rules.
Why?
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Different Types Of Retirement Accounts
Retirement accounts, like 401 accounts or Individual Retirement Accounts , are commonly a couple’s largest assets. Individuals with 401 or similar accounts typically fund the account while working throughout the marriage. Your employer may offer a matching contribution, which increases the balance available when you retire.
An IRA is like a 401 in that they both offer valuable tax benefits, but an IRA has a wider variety of investments, usually doesn’t have the same fees as a 401.
A pension plan is a retirement account that requires an employer to deposit funds into a pool set aside for an employee’s future benefit. Many teachers, firefighters, and police unions utilize pension plans. Employees can invest additional income into their pension from their wages, and employers can match the contributions.
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