Help! My attorney says I need a QDRO. . . What exactly is that?
IT IS SURPRISING HOW OFTEN THIS QUESTION COMES UP. THE EASY ANSWER IS A QDRO IS SHORT FOR QUALIFIED DOMESTIC RELATIONS ORDER.
FOR THE LONGER ANSWER WE ARE GOING TO DISCUSS:
- WHEN DO YOU ACTUALLY NEED A QDRO?
- WHAT IF THERE IS A MILITARY PENSION INVOLVED?
- HOW DO YOU GET A QDRO?
When do you actually need a QDRO?
After answering the question of what is a QDRO, the next most common question is when do you actually need one or why would you get a QDRO?
QDROs are often associated with divorce cases. It is a legal document issued by the court that allows for a retirement plan to be divided.
Taxes are involved- the party receiving the divided assets are responsible for the taxes and has the ability to roll the assets into another retirement account. If the beneficiary receiving the assets is a child, then the taxes responsibility goes to the plan participant. Be aware the standard mandatory tax withholding is 20%.
Also be aware that if the party receiving the assets is not rolling everything into another retirement account, the assets distributed are exempt from the 10% early withdrawal penalty.
How that works in reality: if the party needs part of the assets to buy new furniture or a house they are still paying taxes on the assets received. The retirement plan is withholding 20%, and when taxes are filed the assets will be taxed at the ordinary income rate. The additional 10% early distribution penalty will not be applied even if the party is under the age of 59 1/2.
IT IS ALSO IMPORTANT TO KNOW WHAT TYPES OF ACCOUNTS DO NOT AND DO NEED A QDRO.
QDRO is not needed for the following: IRA
- Roth IRA
- Non-Qualified
- Joint with Rights of Survivor
QDRO is needed on anything that is covered by the Employee Retirement Income Security Act (ERISA): 401(k)
- Roth 401(k) 403(b)
- 457
- Profit Sharing
- Federal Thrift Savings (TSP) Pensions
What if there is a Military Pension involved?
Great question!
There is actually something called the “Uniformed Services Former Spouse Protection Act” that allows local courts to treat retirement pay in one of two ways:
- Property solely of the the service member
- OR as property of the service member and spouse to in accordance with the laws of the court
In addition, former spouses have the right to receive certain military benefits as long as criteria are met.
Fact- there is not a minimum number of years a couple must be married in order to receive pension benefits.
There is something called the 10/10 rule though. It allows the former spouse to be paid directly from the Defense Finance Accounting Service (DFAS). This rule applies if the former spouse was married to the service member for at least 10 years of the service member’s military service.
Really important detail- the military pension needs to be addressed during the divorce (not after).
You need a court order, sometimes called a Military Pension Order (MPO) to divide the assets. There are specific procedures to follow in order to receive pension payments directly from DFAS.
How do you get a QDRO?
Typically it is the receiving spouse (the one getting the assets) that goes through the process of getting the QDRO. Also, the process needs to be started before the final orders and separation agreement are complete to ensure everything gets signed off on.
You would contract a QDRO specialist or do it yourself.
The reason you contract a QDRO specialist (or someone work with you the DFAS process) is you want it done correctly- for example if the QDRO is done incorrectly the value of the amount expected to transfer could be decreased. Also it is helpful to fully understand all of the options and rules specific to your situation.
If you do it yourself, make sure your get the verbiage that needs to be included from the plan sponsor and ensure they will accept what is put on paper. Plan administrators can reject QDROs for various reasons and it is a good idea to know what they need as early in the process as possible.
Whether you do it yourself or hire a specialist, you then need to get the appropriate approvals (ex-spouse and judge). Then you get to submit the QDRO to the plan administrator to get implemented.
REACH OUT TO YOUR ATTORNEY OR CDFA OR FINANCIAL ADVISOR FOR QUESTIONS SPECIFIC TO YOUR CIRCUMSTANCES.
While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJA, we do not render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
