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Five Things To Know About QDROs
After a divorce, there is still another important document to file: a qualified domestic relations order (QDRO). A QDRO can ensure that you will not face tax penalties for early disbursement of retirement benefits. It also protects your rights to what you were awarded in the divorce.
Below are five things you should know about QDROs. If you have additional questions, please reach out to me, and I can talk you through the process.
You Shouldn’t Wait To File A QDRO
Waiting to file a QDRO may result in the loss of your rights and, potentially, the loss of the benefits you won in the divorce. Your ex-spouse could take many actions before you draft a QDRO, including:
- Retiring from their job
- Quitting or losing their job
- Withdrawing money or taking out a loan from the account
There are other reasons beyond your control that could affect your access to your benefits. For example, your ex could remarry. He or she could pass away. That is why it’s so important to file a QDRO in a timely manner.
The Spouse Receiving The Benefits Should File The QDRO
People often ask who should file the QDRO in their case. Most of the time, it should be the spouse who is receiving benefits from the other spouse.
What happens when both spouses have retirement assets? If you and your spouse both have these types of assets, you may want to discuss which of you is entitled to each of the assets. In this case, you would file the QDRO jointly. However, if you can’t agree on this, the spouse with the least assets should file the QDRO.
What Type Of Assets Does A QDRO Protect?
QDROs cover many types of retirement accounts, including:
- 401(k)s and 403(b) plans
- 457 plans
- Simplified Employee Pension (SEP) plans
- Profit-sharing plans
- Employee stock ownership plans (ESOP)
- Deferred compensation plans
- Tax-sheltered annuities
- Business or corporate defined benefit plans
If you do not see your type of account listed here, please contact my firm to learn whether your account is appropriate for a QDRO.
QDROs Can Be Used For More Than Property Division
People typically think of a QDRO as a tool used in divorce to divide the marital assets, but it also has other uses. Retirement assets may be used for spousal support or child support. The tax implications vary depending on who receives the assets. A former spouse who receives them must report the payments like a plan participant, whereas the plan participant is taxed when the assets go to a child. I understand that this can be confusing, so I will explain the tax considerations in your specific case.
You Need An Experienced Lawyer To Draft A QDRO
Due to the complexity of QDROs, it is best not to attempt to draft one on your own. You also do not want an inexperienced attorney to draft a QDRO. Some of the potential risks include:
- Significant tax and early distribution penalties
- Minor wording changes or mistakes that can cost you hefty legal fees
- Failure to identify all retirement assets
- Failure to understand and follow state regulations
All these risks can cost you considerable money that was critical to your overall post-divorce financial well-being.