Among the top five questions a potential divorce client asks is, “What happens to my retirement income?”
There are numerous misconceptions about how 401Ks, pensions and IRAs get divided during divorce. Livingston County Divorce Attorney Kathryn Wayne-Spindler explains, “I can’t tell you how many people are surprised to discover that they won’t have to pay huge tax penalties or miss out on their spouse’s retirement benefits.” In the interest of dispelling a few common retirement asset division myths, we offer this quick QDRO quiz:
- QDRO stands for:
A – Quality Direct Retirement Offer
B – Qualified Domestic Relations Order
C – Quick Divided Remuneration Option
D – Quantified Distribution Resource Organization
Answer (B) – QDRO means Qualified Domestic Relations Order. According to the United States Department of Labor, “A ‘qualified domestic relation order’ (QDRO) is a domestic relations order that creates or recognizes the existence of an alternate payee’s right to receive, or assigns to an alternate payee the right to receive, all or a portion of the benefits payable with respect to a participant under a retirement plan, and that includes certain information and meets certain other requirements. Reference: ERISA § 206(d)(3)(B)(i); IRC § 414(p)(1)(A)”
Did that help? Didn’t think so. It’s no wonder there are so many misconceptions with definitions like that. Kathryn Wayne-Spindler explains it in plainer terms – “Qualified” means that a court has determined that the parties and assets fit the requirements for division. “Domestic Relations” pertains to the relationship status as former spouses. “Order” refers to the official, enforceable instructions that determine division of assets.
2.True or False? A QDRO divides all retirement funds equally between divorcing spouses.
Answer (False) – First off, generally the funds to be divided are only the retirement assets earned from the day of marriage through the day of divorce. Retirement assets accumulated before marriage are usually retained by the party that earned them. Second, there are many ways of equitably dividing a couple’s mutual assets. Sometimes a spouse will opt to trade a share of the retirement funds in exchange for real estate or a smaller share of the mutual debts. On another note, do not confuse “equitable” with “even.” Each judge will determine a fair division of assets taking into account current need, income, pre-marital agreements and to a small degree, fault. That is, unless the parties can decide without the help of the judge.
3. True or False? Assets dispersed by QDRO must be reinvested in the same types of accounts from which they originated.
Answer (FALSE) – The recipient of QDRO assets can choose to rollover those funds into an existing 401K or IRA or open a new account depending on what is allowed. The recipient could also opt to invest in real estate or use the money for living expenses. However (and this is a substantial however) be aware of the tax implications of utilizing retirement funds for non-retirement purposes and prior to retirement age. Consult with a financial advisor for more information on withdrawal penalties and alternate uses of retirement assets.
4. Which types of retirement assets are NOT divided by QDRO?
A – Pensions
B – 401Ks and 403Bs
C – IRAs
D – None of these
Answer (C) – Pensions, 401Ks and 403Bs all require a QDRO for division. An IRA can be split with a Transfer Incident to Divorce. An Investopedia article about IRA division states, “The recipient will take legal ownership of the assets when the transfer is complete and then assume sole total responsibility for the tax consequences of any future transactions or distributions. This means that if you are going to give half of your IRA to your soon-to-be-ex-wife in the form of a properly labeled transfer incident, she will have to pay the tax on any distributions she takes out of the account after she receives the funds. You will not owe tax on the assets that were sent to her because you followed the IRS rules for transfer incidents.”
5. When is a QDRO filed?
A – Before divorce
B – Along with divorce documents
C – After divorce
D – Anytime
Answer (C) – Although the division of assets is determined during divorce proceedings, the QDRO can actually be filed anytime after divorce up to 10 years later. Beware procrastinators – don’t forget about filing the QDRO. Some people are so anxious to be done with the divorce that they put off QDRO filing until they forget about it. Once 10 years have passed, there is little a court can do to force an ex-spouse to split funds. On rare occasions they are even done during a divorce process for specific purposes.
Experienced Livingston County Attorney Kathryn Wayne-Spindler works with clients to determine retirement asset division that is in both parties’ best interests. Once the division is determined and agreed upon by court order, Wayne-Spindler recommends a company, Divorce Solutions in Southfield, that designs QDROs. For more information about retirement asset division contact the law office of Kathryn Wayne-Spindler & Associates at 248-676-1000. The attorneys help clients throughout Southeastern Michigan including Oakland, Livingston, Washtenaw, Genesee and Wayne counties. The law firm takes cases in Milford; Highland; Hartland; Commerce; Walled Lake; White Lake; Brighton; Howell; Flint; Linden; Waterford; Grand Blanc; Holly; New Hudson; South Lyon and many more local communities.
Written and Posted by Christine Donlon Long, Communications’ Specialist for Kathryn Wayne-Spindler & Associates