What’s the most challenging part of going through a divorce? Of course, there’s the emotional turmoil of witnessing the downfall of your relationship first-hand. If you have kids, the divorce proceedings could also turn into a complex custody battle.
Amidst this rigmarole, couples often ignore one of the most crucial components of finalizing their divorce. That is the aspect of negotiating the distribution of your financial assets. Don’t be surprised if you get caught up in the storm of maintenance, alimony, and child support.
Then there’s the critical question of how you’re going to divide your retirement benefits. Irrespective of whether your spouse and you have worked together to build a shared retirement plan or your spouse is the sole account holder of a retirement plan, it’s essential to negotiate the distribution of these assets.
This is where a Qualified Domestic Relations Order or QDRO steps into the picture. In this blog, we’ll delve deeper into the concept of a QDRO and understand its importance. We’ll also discuss how you can get a QDRO drafted. Let’s get started.
QDRO: A Closer Look
Simply put, a QDRO is a legal document that outlines the distribution of retirement benefits and assets in the event of a divorce. The idea is to assign an alternate payee within the retirement plan, so that a spouse, ex-spouse, child, or another dependent can receive the benefits too.
It’s worth mentioning here that a QDRO doesn’t apply to all types of retirement plans. You can use a QDRO to negotiate your retirement benefits only when your spouse and you share one or more of the following:
- Private pension plan (such as 401(k))
- 403(b) or 457 plan
- Defined benefit plan
- Employee stock ownership plan
The purpose of a QDRO is to ensure that both parties involved in a divorce get equal access to the retirement benefits accrued during the marriage. Also, it specifies how the benefits would be distributed to the alternate payee.
Here are a few key attributes of a QDRO:
- It should be signed by a judge
- It should comply with the Employment Retirement Income Security Act (ERISA)
- It should comply with any state domestic relations law (if applicable)
- It should be related to marital property rights, child support, or alimony
Should You Get a QDRO?
There’s no one-size-fits-all formula to answer this question. It’s natural to think that if you end your marriage on amicable terms, your ex-spouse and you can work out a way to distribute all your assets, including retirement benefits.
But it’s difficult to foresee the kind of financial struggles you might have to face in the future. What if your ex-spouse decides to remarry and start another family? Things get even more complicated when you have a child with them.
The best way to avoid any hassles or misunderstandings in the future is to carve an extensive QDRO during or after finalizing your divorce. Typically, your family law attorney or divorce attorney is the best person to decide whether you need a QDRO.
Additionally, it’s a good idea to evaluate your retirement assets and understand whether they could become a subject of dispute in the future. The most significant advantage of a QDRO is that it guarantees the fair distribution of your retirement benefits. This is particularly crucial if one of you had taken a step back to look after the family, while the other one was professionally engaged.
Also, having a QDRO ensures that you don’t have to pay the mandatory 10% penalty in case of early withdrawal of funds from a retirement account. This comes in handy if you have to invest in a house or car after your divorce.
Hiring QDRO Help
A QDRO, or Qualified Domestic Relations Order, requires attention and expertise that the average person isn’t usually equipped for during a divorce. Even an experienced divorce attorney may not have the required expertise or knowledge to draft a QDRO.
This is because it requires extensive knowledge of various domestic relation laws and ERISA. Also, it’s essential to identify the optimal way to distribute the retirement assets between the plan participant and alternate payee.
That’s why it is wiser to recruit a professional QDRO attorney who can handhold you through the process. Even after the document has been drafted, they’ll help you finalize it in court in the presence of a judge and forward it to the retirement plan administrator.
There’s no way to ease the emotional and psychological toll of a divorce. But drafting a QDRO ensures that you can continue to live a financially secure life in the future. Also, it’ll help you maintain an amicable rapport with your ex-spouse after the divorce.
Going the DIY route with a QDRO can be time-consuming, ineffective, and confusing. Instead, you should consider hiring a specialized QDRO attorney for this purpose. Make sure you choose a distribution plan that suits your immediate and future needs.
Have you ever tried drafting a QDRO on your own or with an attorney? Share your experience in the comments section below.