Why You Need To Focus On Retirement Benefits At The Beginning Of Your Divorce
Securing Your Retirement Post-divorce
An often overlooked but critically important part of your final divorce agreement are the legal and financial issues that arise in retirement benefit division. Legally, this requires a Qualified Domestic Relations Order (QDRO) to be prepared and signed by the court. QDROs are for divisions of pensions and retirement plans.
Some of the most valuable assets in a marriage include 401(k), life insurance, pension plans and other retirement accounts. In most cases, retirement benefits are the largest assets in a divorce. From the start of your case, retirement benefit division should be included in the discussion. A failure to focus on retirement benefits can cost you thousands of dollars and valuable benefits.
If you and/or your spouse have a retirement account, then you will need a QDRO or related order to divide those benefits as part of the divorce. QDROs can also be used to obtain child and/or spousal support from a retirement account. Peace Talks Mediation Services can help you ensure that proper retirement benefit division is part of your final divorce agreement.
How Retirement Benefits Are Divided with a QDRO
The process of property division in a divorce can be difficult. Under California law, most property acquired after the date of marriage will be classified as community property, which means it is equally the property of both spouses. In terms of retirement accounts, nearly all or at least some of the retirement account in question will be classified as community property.
The division of these account(s) is defined by means of a QDRO. A QDRO allows for these account(s) to be divided without penalty costs and fees typically associated with early withdrawal of funds from such accounts.
How Peace Talks Can Help
At Peace Talks, many of our divorce clients need a QDRO to divide retirement benefits in a divorce. We know that you may be wondering whether you need a QDRO, and what the process of obtaining a QDRO actually entails. We want to emphasize that it is our job to make the divorce process as streamlined and smooth as possible for you, and we can do the necessary work to help you divide retirement benefits in your divorce through a QDRO. Most spouses will need this type of court order, and we can help.
You probably have many questions about QDROs, including how long they will take and how much they will cost. A QDRO attorney on our team can talk with you about a flat fee for the QDRO based on the complexity of the order and the amount of time it will take us to draft it. Generally speaking, the more retirement accounts that will be classified as community property and subject to division, the more complex the QDRO will be. For most clients, we can tell you that the QDRO process takes anywhere from two to four months from start to finish.
In the simplest California divorces, couples equally divide their modest assets and move on with their lives. In many dissolutions, the math and the legalities of community property are infinitely more complicated. Dividing the estate down the middle might be impractical, and the complexities of certain estates may warrant more creative solutions. There could be significant disagreement about the value of certain assets, or whether a community property interest even exists. This is when an experienced attorney mediator can be invaluable.
Since estates differ, working with a trained attorney mediator that can knowledgeably address diverse points of law within a broader perspective is important. Peace Talks helps clients establish priorities, choose their battles, and secure their fair share of the estate, so they will emerge from the divorce in the most beneficial financial position.
Supplementary Information on QDROs and Taxes
*The following information is provided by the IRS and shared with you by Peace Talks to help answer your questions regarding the tax issues surrounding retirement benefits division.
IRS Information on QDROs and Taxes
A QDRO is a judgment, decree or order for a retirement plan to pay child support, alimony or marital property rights to a spouse, former spouse, child or other dependent of a participant. The QDRO must contain certain specific information, such as:
- the participant and each alternate payee’s name and last known mailing address, and
- the amount or percentage of the participant's benefits to be paid to each alternate payee.
A QDRO may not award an amount or form of benefit that is not available under the plan.
A spouse or former spouse who receives QDRO benefits from a retirement plan reports the payments received as if he or she were a plan participant. The spouse or former spouse is allocated a share of the participant's cost (investment in the contract) equal to the cost times a fraction. The numerator of the fraction is the present value of the benefits payable to the spouse or former spouse. The denominator is the present value of all benefits payable to the participant.
A QDRO distribution that is paid to a child or other dependent is taxed to the plan participant.
An individual may be able to roll over tax-free all or part of a distribution from a qualified retirement plan that he or she received under a QDRO. If a person receiving QDRO payments is either the employee's spouse or former spouse (not as a non spousal beneficiary), then he or she can roll it over, just as if he or she were the employee receiving a plan distribution and choosing to roll it over.
Publication 504, Divorced or Separated Individuals
Publication 575, Pension and Annuity Income
*The following information is from an article in the Memphis Journal © June 2020, and shared with you by Peace Talks to help answer your questions regarding the tax issues surrounding common uses of QRDOs.
Who Pays the Taxes on a QDRO Distribution after Divorce?
If you receive an eligible rollover distribution under a QDRO as the plan participant’s spouse or former spouse, you may be able to roll it over tax free into a traditional individual retirement arrangement (IRA) or another qualified retirement plan.
Benefits paid to a child or other dependent. Benefits paid under a QDRO to the plan participant’s child or other dependent are treated as paid to the participant. For information about the tax treatment of benefits from retirement plans, see Pub. 575, Pension and Annuity Income.
Benefits paid to a spouse or former spouse. Benefits paid under a QDRO to the plan participant’s spouse or former spouse generally must be included in the spouse’s or former spouse’s income. If the participant contributed to the retirement plan, a prorated share of the participant’s cost (investment in the contract) is used to figure the taxable amount.
The spouse or former spouse can use the special rules for lump-sum distributions if the benefits would have been treated as a lump-sum distribution had the participant received them. For this purpose, consider only the balance to the spouse’s or former spouse’s credit in determining whether the distribution is a total distribution. See Lump-Sum Distributions in Pub. 575 for information about the special rules.
Rollovers. If you receive an eligible rollover distribution under a QDRO as the plan participant’s spouse or former spouse, you may be able to roll it over tax free into a traditional individual retirement arrangement (IRA) or another qualified retirement plan.
For more information on the tax treatment of eligible rollover distributions, see Pub. 575.