Updated: Sep 20, 2021
Often in a divorce case, retirement assets need to be split between spouses. This is more complicated than just writing or receiving a check from or to your ex-spouse since this money is usually held in specially designated retirement accounts that have tax implications if money is withdrawn. Because of these tax implications, a special document called a "Qualified Domestic Relations Order" also known simply as a "QDRO" is drafted after your divorce is finalized.
What is a QDRO? This document is used to split a variety of types of retirement accounts post-divorce. This document is an Order that splits the retirement account as the Judgment of Divorce designates. These are complicated documents to draft and require pre-approval by the retirement company and entry with the Court, either your attorney's office or a specialist will draft these.
What will I get with a QDRO? This Order will split off the retirement account money into a separate acccount with the same tax basis as the original. For example, if you are receiving a portion of a 401k account, your portion of that account will be put into a separate 401k account with the same provider. Let's look at an example:
Wife is supposed to receive $20,000 from Husband's employer's 401k account with ABC Retirement. A QDRO is prepared and entered. Wife receives a new $20,000 account with ABC Retirement and can now withdraw this money, leave it as is or roll it over to a new account without affecting Husband's original account with ABC Retirement.
Can't I just get a check from my spouse? No. The party that withdraws retirement account money, depending on what type of account it is, may face tax liability on the withdrawn funds. Take for example, a traditional 401k account withdrawal. Since this money was put into the account tax free, when it is withdrawn, you will need to pay taxes on the money when it is taken out of the 401k. Additionally, if you are below retirement age when you withdraw, you may also incur a 10% early withdrawal penalty. If your spouse withdrew this money and wrote you a check, the spouse would then incur the penalty and taxes in THEIR name.
How long does this take? This is unfortunately sometimes a long process that is dependent on how long the company takes to approve and implement orders. A rough estimate is 3 months to a year.
Can I do this myself? A QDRO needs to be drafted by a professional in order to have retirement funds transferred correctly. It is not likely a non-legal professional will be able to do this on their own. There are specialized companies that handle QDROs in addition to your attorney's office, however, it's important to remember that even if you have one of these company's prepare your Order, that Order still needs to be entered with the Court appropriately, which will need to be done by an attorney.
If you need a QDRO completed, call our office today for assistance. 269-381-4471