Dividing Retirement Savings May Require a QDRO
It is a very common scenario for a couple to divorce after putting a retirement plan in place. What many do not realize, however, is that certain instruments are not divisible under the sole authority of a divorce decree. Many retirement accounts require an instrument referred to as a Qualified Domestic Relations Order (QDRO). It is important to be aware of which assets may require a QDRO, as failure to appreciate this necessity could have severe tax consequences.
Definitions and Terms
Some retirement instruments may be divided or disbursed under the terms of your divorce decree. The most common example of these would be an Individual Retirement Account (IRA). An IRA is an investment account usually opened by an individual or small business to hold the proceeds of other assets such as stocks or mutual funds. However, most accounts or instruments that are specifically designed for retirement must be handled through the use of a QDRO. The QDRO may be addressed in the divorce agreement, but the relevant asset cannot be disbursed via the divorce agreement itself.
A QDRO is a document in two parts: a domestic relations order, and a qualification of that order. A judge may issue a domestic relations order, but if that order contains provisions that distribute any property interest vested in one person to another payee, it needs to be qualified. For example, pensions are property interests that are often at issue during a divorce. In most states, including Illinois, ex-spouses can be granted shares of a pension. To grant that interest, however, a QDRO is necessary to remove the shares from one spouse’s ownership and transfer them to the other spouse.
Ensuring Your QDRO Is Valid
The pivotal part of the QDRO process is ensuring that it complies both with your retirement plan’s rules and the federal Employee Retirement Income Security Act (ERISA). There are certain provisions that must be included in a domestic relations order for it to be qualified as a QDRO, including:
- The name, address and any other pertinent information of both the participant in the plan and the alternate payee—for example, the employee and the soon-to-be ex-spouse;
- The plan information;
- The dollar amount or percentage of the plan that is to go to the alternate payee as determined by the process of equitable distribution of marital assets; and
- The period or number of payments for which the order is applicable.
Be advised that it is possible to avoid a QDRO altogether if your spouse will accept a greater share of marital property in exchange for forgoing his or her portion of retirement benefit. Choosing to do so, however, could result in an increased tax burden.
Speak With a Property Division Lawyer
It can be difficult to ensure that all goes smoothly in a divorce. If you have further questions about QDROs and asset distribution, contact an experienced Kane County divorce lawyer. Call 630-232-9700 for a confidential consultation at The Law Offices of Douglas B. Warlick & Associates today.
Sources:
http://money.cnn.com/retirement/guide/IRA_Basics.moneymag/
http://www.ilga.gov/legislation/ilcs/documents/075000050k503.htm
http://www.dol.gov/ebsa/faqs/faq_consumer_pension.html
http://www.dol.gov/ebsa/faqs/faq_qdro.html
