When going through a divorce, there are several financial considerations you must make. Though it may seem as simple as splitting the money in your joint bank account, the process of dividing assets is exhausting. One of the most complicated assets to divide during a divorce is retirement plans. Because the money is inaccessible without incurring exuberant fees, you must draft a QDRO to ensure the non-participant spouse receives the money they are entitled to. As this is a complex process, you’ll want to enlist the help of a Los Angeles divorce attorney to help you draft the document correctly.
How Does a QDRO Work?
California is a community property state, meaning the assets you and your spouse accrued during your marriage are split evenly during a divorce. One of the assets included in this is a 401k, or employer-sponsored retirement plan. During a divorce, your spouse is entitled to 50% of the assets you accrued during your marriage, as this is considered marital property.
However, an individual retirement account, or IRA, is not included in a QDRO. This is because they are not covered by the Employee Retirement Income Security Act. Any assets in an IRA are treated like any other marital asset.
The main reason a QDRO is beneficial is that it allows for the withdrawal of a 401k without the penalties that would usually accompany an early removal. Similarly, the non-participating spouse is not taxed on the funds as long as they are placed into a retirement account. If they are not placed in a retirement account, they are subject to a 10% tax.
What Should the Document Include?
For a QDRO to be valid and legally recognized, it must include the following information:
- The name of the participant and alternate payee (the non-participating spouse)
- The last known mailing address of the participant and alternate payee
- The dollar amount or percentage that will be paid to the payee
- The number of payments or the time frame of the order
You should also include stipulations for different circumstances, like what would happen to the QDRO if the retirement plan ceases or the participating spouse or alternate payee passes away.
What Is an Example of a QDRO?
Take Jane and John, for example. They have been married for five years before filing for divorce. John had $50,000 in his 401k account, $10,000 of which was in the account before the couple got married. John will keep the initial $10,000, but the remaining $40,000 will be split evenly between John and Jane as it is considered marital property.
If Jane has an IRA account with $30,000, the QDRO will not apply to these funds as it is not covered under the ERISA. Instead, this money will be divided during settlement.
When going through a divorce, it’s essential to retain the help of a lawyer who keeps your best interests in mind, as this is a confusing and emotional time. Contact the Zitser Family Law Group, APC today for help navigating the QDRO process.