19 Nov What are Qualified Domestic Relations Orders?
Q is for Qualified Domestic Relations Orders. These orders are often commonly referred to as QDROs. QDROs are court orders that allow a spouse whose name is not on a retirement plan to receive benefits or monies from the retirement plan. QDROS are used for retirement plans including 401k plans, defined benefit pensions, 403b plans, and other employer-sponsored retirement accounts.
Assuming you need a Qualified Domestic Relations Order to access a retirement account–and you should never make this assumption without first speaking to an attorney–getting one is really the least of your worries. There are companies that are dedicated to drafting QDROS. There are attorneys and paralegals who will draft QDROs. And although I never recommend it, there are sample orders that you can get from the retirement plan administrator.
Having QDROs drafted can be an expensive and long process. Too often parties wishing to divide assets quickly and inexpensively make uninformed decisions about their pension assets. Below, I will discuss the top three mistakes that we see.
Early Withdraw Penalties
When couples withdraw money from a 401k without using a QDRO, they risk paying substantial tax penalities. These penalties are known as early withdraw penalties, which you pay at tax time in addition to the income taxes that you will have to owe on the monies that you withdrew. These penalties can be avoided during a divorce. However, to receive the benefit of the divorce exception, you need to strictly comply with the tax codes. The penalties are high so don’t make that withdraw until you consult with an attorney.
Not All Assets Are Equal
When couples have money in savings accounts and in their retirement accounts, they are often tempted to give one person the savings and the other the retirement. Unfortunately, not all money has the same value. Money in your Savings Account has a greater value today than money sitting in your 401k. Money in your savings account is available today (or as soon as the bank opens) and accessing it should not cost you tax penalties or create income that you will later have to pay taxes on. Money in a 401k is not accessible today and if you do take it out it will be subject to income taxes under the best case scenario, and income taxes and penalties under the worst case scenario. So before you take one asset or the other, consult with financial professional to make sure you understand the actual value of what you are receiving.
Time Is Not Always On Our Sides
Retirement savings depend on the value of money over time. This is especially true when one or both of the spouses have defined benefit pension(s) to be divided. With a defined benefit pension, you can expect to receive a monthly payment upon retirement. The monthly payment continues for your life and in some circumstances the payment or a portion of it can be given to another person upon your death. Spouses often want to negotiate a buyout of one spouse’s interest in the other’s pension or agree to everyone keeping their own when two pensions exist.
Entering into either of these agreements should not be done lightly. Pensions are becoming less common so dividing this asset deserves some careful consideration. Before you give up your interest in your spouse’s pension, consider the following. Is the present day value of the pension enough to compensate me for the loss of the future monthly payments? Does my employer offer a comparable plan? Do I have enough working years left to regain what I am walking away from? The answer to these questions should assist you in making an educated decision regarding the community property pension assets.
Before you divide your pension assets, purchase a 15-minute phone consult. The small fee you pay for our legal advice could save you thousands in lost pension assets or wasted QDRO preparation fees.