Dividing Retirement Interests in a Divorce

Posted by & filed under Divorce.

It is important to consider some distinctions in retirement interests and the way they are divided in a divorce.  A Qualified Domestic Relations Order (QDRO) is commonly needed so that both spouses can have separate interests in a retirement account without problems associated with tax penalties and early withdrawals.

The QDRO process involves the two spouses, their attorneys, the court and the plan administrator. Sometimes, an additional person is involved, if the attorneys outsource the drafting of the QDRO to a third party.  Each party and their attorney must approve a QDRO draft, the court must sign it, and the plan administrator must pre-approve (early in the process) and implement (late in the process) the QDRO.

Oftentimes, the asset that is divided by the QDRO is a 401(k) account or pension that neither party plans to tap into for many years.  In that case, the time involved in processing a QDRO is of minimal concern. However, when one or both parties needs to liquidate some retirement funds to pay debts or purchase a house, it is a problem that the process takes so long.  The benefit of the long process, though, is the ability for the spouse receiving a share of the other spouse’s account to cash out their share without tax penalty.

When the parties are dividing an IRA (individual retirement account), a QDRO is not necessary.  The bank should implement the division as set forth in a court-signed decree.  If one or both parties cashes all or part of the account, most of the time, there is an early withdrawal penalty.

Consequently, the division of an IRA provides a time advantage, but a tax disadvantage; and the division of a 401(k) or pension provides a tax advantage, but a time disadvantage.

 

 

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