Going through a divorce comes with a lot of unexpected and often confusing paperwork. As overwhelming as it may be, it's important to make sure you've done your homework and obtain all of the necessary legal documents, orders, and agreements so that you walk away with your fair share of financial assets.
If you or your spouse has a pension plan, this includes obtaining a qualified domestic relations order. If you're not what sure what that means, don't sweat it. Ahead, discover answers to a few common questions you might have regarding this legal agreement.
What is a qualified domestic relations order?
Otherwise known as a QDRO, this needs to be included in a divorce settlement agreement when dealing with pension funds. If you have a pension, this order establishes your soon-to-be ex's legal right to receive a designated percentage of your qualified plan account balance or benefit payments and vice versa.
For instance, if you're the partner with the pension, your ex will become entitled to an agreed portion of the funds. They'll also be responsible for paying the related income taxes when they receive the money in the form of a pension, annuity, or withdrawals. Essentially, they'll become a co-beneficiary of your existing qualified plan pension account.
Additionally, the QDRO arrangement permits your ex to withdraw their share of the funds and roll the money over into their own IRA so long as they follow the terms of the qualified retirement plan. The IRA rollover procedure will allow your ex to take over management of the money while continuing to postpone taxes until funds are withdrawn from the IRA. That means that your ex will be the one who owes taxes on their share of the funds, not you.
What happens when qualified retirement account money goes to your ex without a QDRO?
Without a QDRO, qualified retirement account money awarded to your ex will be treated as a taxable distribution to you. This means you'll owe the IRS for money that actually winds up in your ex's pocket. It's a tax-free windfall at your expense. In addition to the income tax bill, you may also have to pay the 10% premature withdrawal penalty if you are under age 59 and a half.
That's why it's pivotal to obtain a QRDO if you're going through a divorce and have pension funds on the line.
What information do you need to have in a divorce decree?
You'll need to have the name and mailing address of the "plan participant" and the "alternate payee" in your divorce decree. If the pension is in your name, you're the plan participant and your spouse is the alternate payee.
Be sure to include any and all retirement qualified plan accounts that need to be split up during a divorce. If you and your spouse both have accounts, they'll both need to be listed.
Additionally, the decree will need to include the name of each plan to which the order applies along with the dollar amount or percentage of benefits to be paid from each account to the alternate payee. The paper should also specify the number of payments or benefit periods covered by the QRDO.
Finally, the decree has to indicate that a qualified domestic relations order is being established under your state's domestic relations law and Section 414(p) of the Internal Revenue Code.
Can a divorce attorney handle all of this?
You can't always assume that your divorce attorney is well-versed in QDRO matters. So, you may also want to consult a tax professional with divorce case experience to make sure all the required bells and whistles are included. Obviously, this needs to happen before the divorce papers are finalized.
What can you do if you need money to live on before the divorce is final?
If you need money to live on now, you can elect to have the funds transferred from your spouse’s retirement plan directly to you, rather than transferring them to an IRA. You will have to pay tax on the money you receive, but you won't be responsible for the usual 10% penalty if the money comes from a retirement plan other than an IRA.