5 Things You Should Know About Divorce, QDRO’s and Retirement Income

The division of property can sometimes be complex and somewhat tricky during a divorce.  In general, retirement income is marital property, to the extent that income was earned, accrued, or vested during your marriage.  This means that if you divorce, that income will need to be shared with your soon-to-be-ex-spouse.

QDROs (Qualified Domestic Relations Orders) are typically involved when there is a pension plan that needs to be split between a divorcing husband and wife.  The QDRO establishes your soon-to-be-ex-spouse’s legal right to receive a designated percentage of your qualified plan account balance or benefit payments.

QDROs are confusing for a lot of folks, and some people are intimidated by the topic. As such, we thought we would break down the 5 most important things you should know about QDROs and divorce, in easy to understand bites:

#1.  A QDRO allows your ex to withdraw their share of the pension monies and roll them over into their own IRA (to the extent that withdrawals are permitted by the terms of the qualified retirement plan).  This IRA rollover procedure allows your ex to take possession of the money while deferring taxes until the funds are withdrawn from the new IRA.  It is important to note here that your ex will be the one who owes the taxes.

#2.  If the documented QDRO violates the specific pension plan rules or does not comply with the actual pension in any way, the receiving spouse gets nothing.  Even if a judge has signed a judgment if divorce that says you get a specific share of the pension, you still will not get anything. It is very important that you understand the specific rules of the pension before drawing up a QDRO!

#3.  If you are on the receiving end of a QDRO and your spouse dies before they actually retire, you will not receive any of the pension unless the QDRO specifically contains a survivor benefit.  It is very important that your attorney specify this when writing the QDRO.

#4.  Retirement monies are usually considered deferred compensation, and only the portion that vests during the marriage will be payable (in part) to the receiving spouse.  This is, of course, not always true, but is normally the case.

#5.  Some people wonder what happens when qualified retirement account money goes to their ex without a QDRO.  Well, typically it’s treated as a taxable distribution to the payer (the spouse who is giving away part of their pension).  If you are the payer, this means that you will be responsible for paying taxes to the IRS for the money that you are giving your spouse.  In addition, if you are under the age of 59 ½ you may also have to pay a 10% premature withdrawal penalty.  As you can see, a QDRO is very important for both the payer as well as the receiver of the transferred pension money.

Due to the complexity of QDROs and the varying pension rules, we highly recommend that you consult a tax professional who has solid experience working with divorce cases to ensure all pertinent details and impacts are understood before your divorce papers are finalized, so when the QDRO is drafted there is no confusion.

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Disclaimer – The materials contained in this blog have been prepared for informational purposes only. The information contained is general in nature, and may not apply to particular factual or legal circumstances. In any event, the materials do not constitute legal advice or opinions and should not be relied upon as such.

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