Women make up almost of half of the U.S. labor force today, and the employment rate of married mothers with children has increased from 37 percent in 1968 to 65 percent in 2011, according to a 2013 study from the Pew Research Center. Still, 23 percent of U.S. women are stay-at-home moms to children under the age of 15, which means it’s essential for women in single-income families to protect themselves financially in the event of a divorce.
Generally, this means a spouse who earns more will be at a huge advantage when it comes to plans that will provide income in retirement. If a couple is facing divorce, their settlement will typically divide those pension plans, 401(k)s, or IRAs. What many couples — and sadly, some divorce attorneys — don’t understand is the settlement agreement isn’t enough. You need a Qualified Domestic Relations Order (QDRO).
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What is a QDRO?
A divorce settlement is a binding agreement between you and your spouse. A QDRO (“Quadro”) is the legal document that instructs a retirement plan custodian or administrator to divide the assets in the account per the terms of your settlement agreement. Some examples would be dividing the current balance of an IRA, 401(k) money, or future income from a pension plan.
The QDRO may be written by your attorneys, but it will be issued by the court. It is an enforceable court order for the retirement plan to assign benefits to the former spouse of the plan holder. Even if your spouse has signed a settlement agreeing to the split of a retirement plan, the plan administrator cannot do so without the court order.
A QDRO is the only way to legally divide the benefits of a retirement plan without creating a taxable event. If your divorce settlement says that your spouse should receive 50 percent of your IRA, and you take half the balance and give it to your spouse, you are liable for 100 percent of the taxes on the money you took from the plan — even though you didn’t keep the money. To top it all off, you may also be subject to the IRS early withdrawal penalty if you are under age 59 ½. With a QDRO, when the funds are divided, they remain inside a qualified plan. There will be no taxes due until you or your spouse withdraw them.
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It is critically important that your QDRO be prepared and submitted to the retirement account’s custodian or administrator before your divorce is finalized. If you wait until after you are divorced, you may forfeit the right to benefits to which you would otherwise have been entitled. Many people also don’t realize the company that controls the retirement account will need to review the QDRO to be sure it complies with the terms of the plan.
For example, you and your spouse may have agreed that you should receive $100,000 from his pension to rollover to your own IRA account. However, if the pension plan does not allow for funds to be rolled over until your spouse retires, the plan administrator will not be able to comply with the QDRO. They will ask you to submit an amended QDRO that fits the plan’s rules, such as an agreement you should receive 50 percent of the available distribution at the time your spouse retires. Your QDRO should be written and submitted well in advance of your divorce to allow time for any revisions and additional review time that may be needed.
Remember, even the best divorce attorney may not be an expert on the mechanics of dividing retirement assets. If you are going through a divorce and you or your spouse have retirement accounts, you should consult a financial expert, like a Certified Divorce Financial Analyst (CDFA), to assist you in determining how these assets should be divided and what steps will need to be taken.
Cathy DeWitt Dunn is a financial services professional specializing in helping people take control of their money to attain long-term financial security. She is the driving force behind Annuity Watch USA and Women Money & Power––education and resources websites designed to help consumers take control of their financial future.
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