Our founder, Kristyn Carmichael, was recently featured in Salon regarding how to protect your retirement funds during a divorce. As a Certified Divorce Financial Analyst, she specializes in helping our clients divide their assets, with a specific focus on complex assets. Check out the article HERE and Kristyn's interview below:
What is a QDRO?
On a basic level, a Qualified Domestic Relations Order or Domestic Relations Order is a special legal document used for the division of retirement accounts during a divorce process. If you were to try and divide a retirement account outside of a divorce, you will typically be hit with 10% penalties (if withdrawn prior to 59.5 years of age) as well as taxes (dependent on the type of account). With a QDRO during a divorce, this eliminates taxes or penalties when dividing an account.
When is it used or needed? How does it work? What is the financial impact for each party?
During the divorce process, the parties reach agreements on the division of retirement accounts. A QDRO would then be drafted with directions to the custodian of the account (such as Fidelity, pension administrator, etc.) on how the account should be divided. So as an example, let's say Husband has a 401(k) and 50% should be awarded to Wife through the divorce. The QDRO would provide direction that 50% of the account value should be divided into Wife's name. The 401(k) administrator would receive the QDRo and split the 401(k), taking 50% of the value and putting it into a 401(k) in WIfe's name alone. The remainder would stay in Husband's account. Then Wife could do what she wants with her portion of the account, such as rolling it into an IRA or other account type in her name. A QDRO helps people avoid taxes and penalties when splitting accounts during a divorce, as well as moving money into each spouse's individual name.
Which accounts apply?
A QDRO is used for most typical retirement accounts, such as 401(k), 403(b), 401(a), or many pensions. Kind of rule of thumb - if the account starts with a "4" or is a pension, a QDRO or similar documentation is needed. An IRS does not need a QDRO. Instead, this can be divided solely with the divorce decree. This is a benefit as it's a cost savings for clients - they don't need to pay for QDROs to be drafted.
What are some issues that can arise or things people should be aware of?
The main issue that arises is if the original divorce decree or agreements of the parties are too vague. This can then cause substantial conflict when working with the QDRO professional to divide the accounts. Additionally, it is important to divide the retirement accounts as soon after the divorce is final as possible - ideally less than 60 days after the divorce is final. This prevents any future financial issues. For instance, if a spouse were to pass away before their accounts are divided and shared with their spouse. Or a spouse avoids sharing funds with their partner or splitting the account as conflict grows post-divorce. This can keep this more clean for the parties.
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