EMPLOYER SPONSORED PLANS
One of the most complex parts of a divorce can be the division of a retirement account. If not done properly, it can lead to years of unrest, undue tax penalties & potential litigation with your former spouse. While IRA & Roth IRA accounts are typically divided fairly easily, employer-sponsored accounts such as pensions, 401k, 403b & 457 plans must always be divided via a legal document called a Qualified Domestic Relations Order, or QDRO.
ALTERNATE-PAYEES & PLAN SPONSORS
QDRO documents are written to protect the plan sponsor from potential legal issues. The plan is on the hook for the division of the account and they will make sure that the transference of money is done correctly. Therefore, the wording of the QDRO is very specific to the plan & the QDRO will most likely be deemed “unqualified” if the plan doesn’t like the document. What does this mean? It’s critical the QDRO is drafted by an experienced attorney or group who understands the intricacies of QDROs.
The individual who receives the funds from a former spouse is always referred to as, “the alternate-payee.” Much like the plan sponsor is protected in a QDRO, the same can be said for an alternate-payee. For these individuals, it can be commonplace to see them accrue attorney fees & other expenses throughout the divorce. A little known IRS rule can make all the difference for a non-working spouse.
Pursuant to IRS Rule 72t, the alternate-payee may have penalty-free access to the retirement account prior to normal retirement age. Specific rules must be followed or any premature distributions could be subject to the normal 10% penalty. Additionally, as most retirement plans are pre-tax, any distributions will create tax liabilities. A proper tax planning strategy must be implemented to ensure divorcing couples understand both the short & long-term ramifications of any retirement distributions. The bottom line is, don’t screw it up.
Schedule a consult with us to ensure you avoid making any serious tax mistakes. Contact our office today if your divorce might include a QDRO. We have years of experience dealing with plan administrators & QDROS.