Tag: retirement

What Is A QDRO & Why Is It So Important?

What Is A QDRO & Why Is It So Important?

Unless you have been through a divorce, you have probably never heard of a QDRO.  If you are going through a divorce and a retirement account is involved, a QDRO is extremely important.  QDRO is a term that means qualified domestic relations order.  This is a special order that is needed to divide a retirement account, such as a 401k account, while minimizing the penalties and taxes.

At its most basic, a QDRO divides a party’s retirement account in a divorce.  It may be drafted by either of the attorney’s involved in the case or by a neutral third party company.  Regardless of who drafts the QDRO, it must conform to certain provisions of the Internal Revenue Service Code, the specific rules of the retirement plan itself and the plan administrator.  Finally, it must be approved by the Court.  As you can imagine, with all of the requirements that must be satisfied, these documents must be prepared with some degree of precision.

Once the QDRO is signed by the court, the circuit clerk will mail the order to the plan administrator who will then begin the process of dividing the retirement account.  Generally, the plan administrator will do his/her best to maximize the tax benefits under the terms of the plan and the QDRO.  Again this division is done without any of the penalties normally associated with taking money out of one of these plans and thereby saving both you and your ex-spouse potentially thousands of dollars.

With a QDRO in place, one spouse will be receiving a portion of the other spouse’s retirement.  The party receiving this portion is called the “alternate payee.”  The only way to get this designation is with a QDRO, otherwise, such a distribution would be deemed an early withdrawal and subject to all of the penalties of an early withdrawal.

This brings up another point, during your divorce, you should never withdraw or borrow money from your retirement account without first consulting with your divorce lawyer.  First, you will most likely run afoul of orders of the court that prohibit such behavior.  Second, you may also be accused of dissipating (wasting) assets because you will incur penalties with the withdrawal.  Third, you will increase your tax obligations for the year.  Finally, it is just a bad idea because you are leave less money for you and your spouse to divide.  Often a retirement account is the second largest asset to divide behind the marital home.  Just like you should not start tearing walls out of the house and destroying the home’s value, you should not damage the value of the retirement account.

Obviously, QDROs are extremely important when going through a divorce.  As with most other things in a divorce, it is something you need to discuss with your family law attorney.

Photo courtesy of 401(K) 2012

The Divorce is Over. Now What?

The Divorce is Over. Now What?

The divorce is over and the dust has settled.  The court has said that you are no longer husband and
wife.  Now what do you do?  The time has come to notify other necessary people that you are divorced and take steps to change your official records and important papers.  Below is a list of some of the issues you need to deal with and people you need to notify.

  • Your Employer:  Make sure your employment records reflect your new single status.  This will require you to change your wage deductions, beneficiaries and possibly other withholdings.
  • Retirement Benefits:  This may fall under contacting your employer, but if you received a share of your spouse’s retirement, make sure you also received a copy of the qualified domestic relations order and contact the plan administrator to make sure they have everything they need to get you the benefits you were awarded.
  • Banks & Investments:  Notify banks, investment clubs, credit unions, etc. of your new single status and make sure your spouse’s name is removed from any accounts you received.  Destroy all old checks from any joint accounts.
  • Insurance:  Again change your beneficiaries.  If you are no longer required to carry certain family members on your policy, contact your company and have them dropped.  If you were covered under your ex-spouse’s employer’s plan, contact the employer immediately about COBRA benefits if you have not made other arrangements for health insurance.
  • Taxes:  Contact your tax professional to discuss your new tax status and what you need to do to prepare for the next tax season.
  • Credit Cards:  Destroy all joint cards and close the accounts or have them transferred to your name alone (or your ex’s if he/she was ordered to pay the debt).  Verify your ending balances.
  • Important Documents:  Review all deeds, titles, and other documents of ownership to make sure property is placed in the name of the person who received it in the divorce.
  • Will/Estate plan:  Review your estate plan and modify your beneficiaries and testamentary gifts accordingly.
  • Power of Attorney:  If your ex spouse had power of attorney over you, revoke it and have a new one prepared.
  • Name Change:  If you changed your name as part of your divorce, you need to have it changed on your driver’s license, the Social Security Administration, and your financial institutions.
  • Social Security Benefits:  If you were married for ten (10) years or more, you have the right upon retirement to claim the higher of your benefits or your ex-spouse’s level of benefits.  Keep a copy of your marriage license and divorce decree to show the Social Security Administration when you qualify to file.
  • Child Support:  If you are receiving or paying child support contact your local child support office to make sure they have your contact information and a case open on you.  This will ensure that you receive proper credit if you are paying or provide a way to prove that you have not received support you are owed.  If there is a substantial change in your or your ex-spouse’s financial condition, you may be eligible for a child support modification at any time after the divorce.

Finally, always keep a copy of your divorce papers in a secure location that you can readily access.  While this list is not an exhaustive list of post-divorce action steps, it will cover most issues that will or could arise after your divorce.  For more detailed information, contact your family law professional.

Photo courtesy of CollegeDegrees360