Dividing Retirement in Divorce - Do I Need a QDRO?

Dividing assets in a divorce doesn’t have to be difficult, but when it comes to dividing retirement, it can get a bit more complicated. At Magnuson Lowell PS, we understand the importance of protecting your financial future. During your divorce, it’s important to work with your attorney and financial adviser to make sure your interests are protected, and often that means utilizing a QDRO to transfer retirement assets.

What is a QDRO?
A Qualified Domestic Relations Order (QDRO) is a legal order following a divorce or legal separation that splits and changes ownership of a retirement plan (or part of a retirement plan) to give the divorced spouse as their separate property. It’s crucial for dividing certain types of retirement plans, such as 401(k)s, 403(b)s, and pension plans.

Why Do You Need a QDRO?

Compliance with Federal Law
Retirement plans governed by the Employee Retirement Income Security Act (ERISA) require a QDRO to recognize the right of an alternate payee (the non-employee spouse) to receive a portion of the benefits. Without a QDRO, the plan administrator is not obligated to distribute any portion of the retirement benefits to the ex-spouse.

Ensures Fair Distribution
A QDRO provides clear instructions on how the retirement plan should be divided, ensuring that both parties receive their fair share. This legal document specifies the percentage or dollar amount to be transferred to the non-employee spouse, making the process straightforward and transparent.

Tax Implications
One significant advantage of using a QDRO is the favorable tax treatment. The transfer of retirement funds under a QDRO is not subject to early withdrawal penalties, and the receiving spouse can roll over the distributed funds into their own retirement account, deferring taxes until the funds are withdrawn.

When is a QDRO Not Needed?
This is usually pretty simple. Whenever a retirement asset needs to be transferred from one spouse’s name to the other spouse’s name, a QDRO is almost always the right answer. A QDRO is not needed for standard stock brokerage accounts, etc., but whenever you have a 401(k), IRA, 403(b), pension, etc., that needs to be transferred into your spouse’s name a QDRO may be beneficial.

Obtaining a QDRO
Drafting the Order
The QDRO must be drafted accurately to meet legal requirements and the plan administrator's specifications. It's crucial to work with an experienced attorney who understands the intricacies of QDROs and the specific retirement plan involved. Very often, once drafted, the QDRO will first be sent for approval to the specific Plan to ensure compliance before sending it to the Court.

Approval Process
The QDRO must be submitted to the court for execution and filing. At that point, it is resent to the plan administrator for review. The plan administrator will ensure the order meets the plan's guidelines before processing the division of assets.

Implementation
After approval, the plan administrator will implement the QDRO, transferring the designated portion of the retirement benefits to the non-employee spouse. It’s essential to monitor this process to ensure it’s completed correctly. You will typically receive a letter once everything has been finished.

Dividing retirement assets in a divorce can be a challenging process, but understanding the role and necessity of a QDRO can help ensure a fair and equitable division. At Magnuson Lowell PS, our experienced divorce attorneys are here to guide you through every step of your divorce, including the division of retirement accounts. Contact us today for a free telephone case evaluation to protect your financial future.

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