What is a QDRO and Do You Need One?
When you and your spouse decide to get divorced in Florida, you or judge will divide marital assets equitably. One type of asset that may be subject to equitable distribution is your retirement account. Typically, 401(k)s and other related qualified employee retirement plans have tax tax-advantaged statuses, meaning that so long as the money within the account is not touched before a certain date, the account holder does not have to pay taxes on it. However, if a person does withdraw funds before that date, the money is not only subject to taxes, but it is also subject to an early withdrawal penalty.
Fortunately, the IRS has devised a way to help divorcing couples around this issue. A QDRO, or Qualified Domestic Relations Order, is a document that, when drafted a certain way, recognizes an alternate payee for funds within a retirement account. Furthermore, it waives the withdrawal penalty and tax charges for funds withdrawn through it regardless of a person’s age or retirement status, hence its use in divorce cases.
QDROs Are Far From Simple Documents
Though you can skirt early withdrawal fees and taxes with a QDRO, a simple mistake can be costly. For this reason, it is imperative that you work with a Boca Raton divorce attorney who can help you draft the document and ensure that it is valid by both court and ERISA standards. If a judge approves a QDRO, it will become an official domestic relations order, which means it is an enforceable order.
A valid QDRO must be structured in a certain way and contain certain information. The alternate payee must also be a spouse, ex-spouse, child, or other dependent. Any other person will not be considered. That said, the QDRO must include the following information:
- The account holder’s name and mailing address;
- The alternate payee’s name and mailing address;
- The percentage of the funds to go to the alternate payee;
- How that percentage has been determined;
- Via how many payments the percentage will be made; and
- How the payments are to be made.
Furthermore, the QDRO must be verified by the appropriate 401(k) plan administrator.
How the Alternate Payee Can use QDRO Assets
There is no law that states that the alternate payee must take a lump sum upon divorce and pay taxes on it right away. In fact, many divorce lawyers strongly recommend against taking a lump sum, unless the retirement account is nearing maturity, the holder of the account plans to retire soon, or the holder of the account anticipates losing his or her job in the near future. An alternate payee may also take the lump sum up front if he or she is in desperate need of cash.
However, if none of the above apply, the alternate payee may choose to keep his or her percentage of the assets in the retirement account and let it continue to grow tax-deferred until the date of maturity. The alternate payee may even negotiate to have the QDRO drafted in such a way as to allow him or her to retain the ability to invest his or her portion as he or she pleases.
Another option for the alternate payee would be to move the money into a rollover IRA. This allows him or her to keep the assets tax-deferred and puts them under the alternate payee’s sole control.
Work With a Divorce Lawyer
If you or your spouse have significant savings in a retirement account, it would be in your best interests to consult with a Boca Raton divorce attorney regarding how you can split those assets in the least taxing way as possible. Reach out to the team at WiseLieberman, PLLC, to discuss your options more in depth today.