Protecting retirement savings in a divorce requires great care and attention to detail and may include a qualified domestic relations order (QDRO).
When getting a divorce in Massachusetts, spouses undoubtedly process a great deal of emotional loss. There may be some financial loss along the way as well, especially as the marital estate is divided. For many couples, this may well involve the loss of some savings intended to provide income during their retirement years.
When the retirement account that must be divided is governed by the Employee Retirement Income Security Act of 1974 (ERISA), the use of a qualified domestic relations order (QDRO) can help to minimize the amount of money that a person loses.
What does a QDRO do?
A qualified domestic relations order gives a person the chance to name his or her spouse as an alternate payee on his or her retirement account. This allows money to be paid directly to that person pursuant to the divorce agreement. Typically the planowner/employee spouse is the only person allowed to take money out of a 401K account. This person is also generally assessed penalties on any money taken out if not for qualifying retirement income purposes.
Under a QDRO, the distribution is not assessed the standard early withdrawal fees that normally accompany a non-retirement distribution. Additionally, the plan participant is not liable for the taxes as the alternate payee assumes this responsibility. The recipient may also be able to defer taxes when receiving the money by reinvesting it in another retirement account.
What details should be included in a QDRO?
A qualified domestic relations order should appropriately protect a person in any number of unforeseen and even unlikely circumstances. For example, provisions should be included to address what happens if that either of the two spouses dies before the distributions have been completed.
In the event that the plan owner dies, the alternate payee may need to be identified as the surviving spouse to receive benefits. If the alternate payee dies, the QDRO could indicate that future distributions to the deceased become part of that person’s estate so that his or her beneficiaries receive what they would have otherwise received.
Where do I go to get a QDRO?
In Massachusetts, divorcing spouses should seek help from a family law attorney when dividing marital assets. This is the best way to get accurate facts about what documents and processes should be followed or used so that financial losses may be kept to a minimum.