There are a lot of things to think about during a divorce, but likely missing from your list is how the proceedings may impact retirement. While alimony and other forms of monetary support are familiar aspects of the divorce process, you may not realize that you can also negotiate to receive a portion of your former spouse’s retirement benefits. To do this, you’ll need a QDRO, or qualified domestic relations order.
A QDRO is a court-ordered decree allowing payments from the retirement plan of an individual (called the “participant”) to be awarded to a former spouse, children, or dependents (called “alternate payees”). Without this order, a former spouse and/or dependents have no right to benefit from the other spouse’s retirement plan, regardless of how the divorce proceedings play out.
The key word in a qualified domestic relations order is “qualified”. A domestic relations order (DRO) is simply the decree issued by the court. In order for a DRO to become qualified, the retirement plan must accept it. That means only the participant has any legal right to benefits until the plan has approved the order. However, if the plan rejects the DRO, they will usually provide information on necessary changes, and you can resubmit. Even so, working with an attorney to properly file the order can ensure there are no mistakes.
When filling out a QDRO, you must include detailed information regarding the retirement plan and the people involved in the order. The most crucial details are the amount or percentage to be paid to the alternate payee, and when and how many payments will occur. Several retirement plans can be included in a single QDRO, but each plan and its alternate payee benefits must be outlined in the order. In other words, the more specific the order can be, the better.
But what about taxes? After all, funds removed from a retirement plan are always subject to taxes, and a QDRO essentially pays an alternate payee as if he or she were a regular beneficiary. Luckily, the order requires any benefit payments made to a child or dependent be taxed to the participant. Your dependent won’t need to worry about being hit with fees to receive the funds.
Additionally, if the alternate payee is a minor child or deemed incompetent, and left in the care of a guardian or conservator, the order can authorize payment be made to the guardian/conservator on their behalf. For more information on how guardianships and conservatorships impact financial decisions, click here.
Even if you’re far from retirement age, your divorce proceedings can still have repercussions on your financial situation in retirement. Without a QDRO, you can lose all rights to benefits once your former spouse retires, remarries, or dies. If you want to guarantee you and your dependents are provided for through your former spouse’s retirement plan, bring it up with Bellah Perez’s divorce attorneys sooner rather than later. We’ll draft an order that will cover all the bases, protecting you and your loved ones with an additional source of monetary support into retirement.
Disclaimer: The answer is intended to be for informational purposes only. It should not be relied on as legal advice, nor construed as a form of attorney-client relationship.