Paule, Camazine & Blumenthal, P.C. posted in Divorce on Wednesday, October 29, 2014.
By Alan Freed
If you’ve never been divorced, you probably haven’t heard the term “QDRO” (pronounced “quad-ro”) but, if you are going through a divorce and talking with a divorce attorney and either you or your spouse has a retirement account or a pension, you will most likely hear this term come up at some point in the discussion.
First, a little background information: When people try to save money for their retirement, they generally hold these retirement savings in accounts that shield the funds from income taxes during their working lives so that they can later withdraw the savings after they stop working. These accounts have names like IRA (“individual retirement account”) Roth IRA, 401(k), and 403(b), as well as some others that are less common.
Once you reach age 59 ½, you can begin withdrawing this money and paying income taxes on the amount you withdraw. Under normal circumstances, if you withdraw the money before reaching age 59 ½, you will pay a penalty of 10% on top of the income taxes. That adds up to a lot of money going back to the government.
However, if you decide to divide these kinds of accounts as part of a divorce settlement, you can avoid the penalties. For example, if Joe has a $100,000 IRA and he and Mary decide that she should receive half of that IRA as part of the division of property in their divorce, Mary can receive her $50,000 as an IRA in her name. She still can’t withdraw the money without a penalty before age 59 ½, but neither she nor Joe will pay any taxes or penalties at the time the account is divided.
If the retirement is in a 401(k), 403(b), or other “qualified” retirement account (“qualified” is an IRS term that your lawyer or accountant can explain), the account needs to be divided through use of a QDRO, which is a document that your lawyer can prepare. This QDRO will be sent to the company that administers your retirement account so that they know how to divide it.
Some workers are entitled to pensions, which are payments made to workers, usually on a monthly basis, after they retire. Just as is the case with retirement savings, such as IRAs and 401(k)s, pensions can be divided as part of a divorce settlement through use of QDROs. In these cases, at the time the worker is eligible to retire, that person’s former spouse will receive a portion of the pension, sent directly to him or her from the pension plan.
QDROs are very technical documents that must be prepared by experienced lawyers. The family law attorneys at Paule, Camazine & Blumenthal can help you better understand your rights regarding pensions and retirement accounts when you are going through a divorce.