Anyone who has gone through a divorce will most likely tell you that the divorce process isn’t easy, no matter the circumstances. One of the most crucial aspects of the process is the division of assets – particularly retirement funds. A qualified domestic relations order, or QDRO, becomes extremely important to ensure a fair legal division during a divorce settlement.
What exactly is the QDRO definition, why does this order matter, and how does it help ensure a fair division of retirement benefits? Below we’ll discuss everything that divorcing couples need to know about a QDRO, including costly mistakes to avoid and how a qualified divorce attorney can help.
What Is a QDRO?
A QDRO is a judicial order that splits ownership of a retirement plan following a divorce or legal separation. The goal of a Qualified Domestic Relations Order is for one spouse to receive a portion of the other spouse’s retirement account without incurring the penalties normally associated with early withdrawals from retirement plans. During a property and asset division in a divorce, one spouse is entitled to a portion of the other spouse’s retirement benefits. A QDRO splits all types of retirement accounts, including 401(k)s, pensions, and other employer-sponsored savings plans.
How QDROs Impact Divorce Settlements
Retirement accounts are often among the most significant assets accumulated during a marriage, and they play a significant role in a divorce settlement. The division of assets can greatly impact a spouse’s financial future, and a QDRO is essential for a fair, accurate, compliant division of retirement assets. One of the smartest reasons to utilize a QDRO is to avoid any penalties and immediate income tax prompted by retirement fund distribution.
QDROs can function as an impactful negotiating tool during a divorce. For example, the alternate payee can negotiate a bigger share of other assets if they accept a smaller portion of the retirement funds. The same is true for spouses who want a bigger chunk of the retirement funds – they have the option to take less of the couple’s other assets in the process.
A QDRO allows the funds to be transferred directly into a qualified retirement account for the alternate payee, deferring taxes until the funds are withdrawn in retirement. This may be a major benefit since it preserves a sizable portion of the asset for the spouse’s future. A QDRO can also help prevent potential litigation over asset division which can happen if one spouse attempts to withhold their financial obligations regarding retirement accounts.
Dividing Retirement Assets Fairly
Dividing retirement assets fairly often requires successful communication between both spouses. Several factors need to be considered when preparing and drafting a QDRO, including:
- The value of the retirement account – Knowing the values of each account is important. Both spouses must agree on when and how to determine the worth of the retirement accounts.
- The future financial needs of each spouse – In retirement, what will be the spouse’s needs financially? Do they have health issues that may prevent them from working? Is one spouse unemployed? The potential needs of each spouse as they age are considered in the process.
- The length of time each spouse contributed to the retirement – If one spouse was primarily responsible for building the retirement account, the court will take this into consideration during the division.
- Any tax implications from the retirement asset division – While a QDRO usually offers the benefit of avoiding penalties from withdrawing early, the division of retirement assets may have tax implications. It’s important to discuss this with an experienced QDRO attorney to navigate any tax consequences.
Why a QDRO Attorney Matters
Drafting a QDRO is a complex process that requires a deep understanding of the complexities of the QDRO process. Just one small error can result in major financial consequences for both spouses, including incorrect payment amounts, tax liabilities, and total loss of rights to receive benefits. A QDRO divorce lawyer will also negotiate terms and ensure that the QDRO is correctly submitted and implemented.
Avoiding Costly QDRO Mistakes
To avoid mistakes when dealing with QDROs, consult with a competent QDRO attorney early in the divorce process. Be sure to provide accurate information about all retirement accounts and include essential terms in the QDRO to avoid confusion regarding the distribution process.
If you’re inquiring “where can I find a QDRO attorney near me?” Zelenitz, Shapiro & D’Agostino is an experienced team of lawyers who can help you build a solid financial foundation for your future, post-divorce. Contact us today for a free consultation and take the first step toward closing a difficult chapter in your life.
