A qualified domestic relations order, or a QDRO, is a court order used to divide retirement plans between divorced spouses. They are an important tool for preserving a retirement plan’s tax advantages when its benefits are split. The process to get one can be complicated, so it’s definitely worth speaking to an experienced family law attorney. But how do you get a QDRO in the first place? Before we go over the process, let’s review the basics of qualified domestic relations orders.
QDRO is short for “Qualified Domestic Relations Order.”
QDROs are court orders that allow a tax-advantaged retirement account to be divided between former spouses.
Once you have the order, you earn a right to the retirement plan or benefit. For example, one spouse’s 401(k) might get divided in half, with the other spouse getting his or her half rolled into an IRA.
Without QDROs, however, dividing retirement plans could trigger some unintended consequences.
Generally, retirement plans are martial property. This means that they are shared between spouses in a divorce proceeding. However, a retirement account is generally only in one person’s name.
QDROs are important for preserving a retirement account’s favorable tax status while splitting it between two divorced spouses.
Most retirement accounts are tax-deferred. Think of a 401(k) or an IRA; these accounts grant you a tax deduction when you contribute to them, deferring your taxes for when you eventually withdraw from the account at retirement age.
However, if you withdraw from an account before retirement age, you are typically subject to significant penalties. You might have to pay a fee or pay taxes on the withdrawal.
In a divorce, a retirement account might be split between the two parties. This would typically trigger some sort of tax consequence Thus, to preserve those tax benefits without triggering a penalty, a QDRO is granted by the divorce court.
With that QDRO, you can avoid early withdrawal penalties, maintain preferable tax treatment, and even preserve those benefits after death if one party dies before the other.
A qualified domestic relations order is issued by a court. The court is the only one that can officially grant the order.
No. You do not automatically get a QDRO.
In fact, you may be ineligible for one entirely. Instead, you have to ask for one and the court must approve it first.
The party requesting the order generally must file a QDRO form. The form will ask the court for a right to some portion of the retirement account.
While there are many templates out there for QDRO forms, it’s recommended to create a custom one relevant to your specific situation with an attorney’s assistance.
If you believe you are entitled to a QDRO, or simply want to learn your options, contact an experienced family law attorney. He or she will be able to develop an ideal strategy and will help you get a QDRO if you are entitled to one.
Every situation is different and a QDRO may not be a guarantee. Sometimes, retirement plans might not be entirely martial property. Other times, one spouse might only be eligible for a smaller portion of a plan or pension.
In any event, it’s definitely worth discussing with an attorney first.
It’s best to request a QDRO as soon as you can.
It is possible to get a QDRO after a divorce ruling or settlement. However, it is significantly easier for both parties to ask the court for a QDRO before the proceedings end.
In a worst case scenario, you might even have to reopen the divorce case to grant the QDRO. If by that point the person with the retirement plan has already retired and is drawing from the account, it may be too late to issue a QDRO.
So, file a QDRO as soon as possible before the end of divorce proceedings. If you do not, you may be losing out on a marital right to a portion of a retirement plan.
Even if you do not get a QDRO, you might be able to work out an arrangement that nets a similar result.
For example, rather than directly splitting a retirement plan, one spouse might get full ownership over a home while the other maintains full control over the plain. Thankfully, there is a fair bit of flexibility in many divorce settlements.
However, without a QDRO, splitting retirement plans might cause far more significant tax consequences and penalties for withdrawing from the plan. And the option to avoid those penalties might not always be available to you.
Qualified domestic relations orders are useful tools for protecting a retirement account’s tax benefits despite splitting the account in a divorce.
However, QDROs are not automatic. Typically, one party requests the QDRO by filing a form. The court then weighs the proportions of the plan(s) that each spouse is entitled to, and issues the order dividing them accordingly. A court is the only one that can officially grant the order.
Once the qualified domestic relations order is granted, the tax benefits on a given retirement account will be preserved even after it is divided.
Divorces can be difficult to navigate, emotionally and legally. The experienced attorneys at Johnston Tomei Lenczycki & Goldberg LLC understand this tough position. We will help you design a legal strategy that best fits your needs. Call us today at (847) 549-0600 or email us at firstname.lastname@example.org to schedule a free consultation.
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