Here a QDRO, there a QDRO, everywhere a QDRO. Walking off the green golfers announce their scores – one guy says “bogey,” one guy says “birdie” and another says “QDRO.” What the heck is a “QDRO?” It is not a golfing term. A QDRO is a “qualified domestic relations order.”
Divorcing couples face a myriad of challenges when attempting to attain an equitable settlement. They have decided on who gets custody of the children, who gets the marital home, who gets the wedding album and they finally agree on the division of the rest of their marital estate. Then a light bulb goes on “what about the retirement accounts?” How are we to divide these assets? This is where a QDRO comes into play.
A QDRO is a court order, which creates or recognizes the existence of an alternate payee’s right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under a qualified retirement plan. The domestic relations order is “qualified” by the retirement plan administrator upon the plan administrator’s determination that the order meets the plan’s rules for segregation.
There are two basic types of qualified plans to which QDRO’s apply:
QDRO’s do not relate to plans not covered by the employee retirement income security act of 1974 (ERISA):
QDRO’s must contain certain information:
In order for the distribution (payment) to be tax-free to the alternate payee, the alternate payee must deposit the distribution into another qualified retirement plan or into an individual retirement plan. If the alternate payee does not reinvest the distribution, he/she will pay federal income tax at ordinary tax rates on the amount not reinvested. The alternate payee will receive a 1099-R indicating the amount of the distribution. Any amounts not rolled over are not subject to the 10% early withdrawal penalty. Non-spouse alternate payees are not allowed this rollover provision and are not subject to the 10% penalty. Currently, the state of Illinois does not tax retirement benefits, therefore any distributions not rolled over are tax-free.
A qualified domestic relations order, when properly executed, is an excellent option when dividing retirement plans and deferring income taxes. Remember, it is imperative that all QDRO’s contain the correct wording for them to work effectively.
Get in touch today and find out how we can help you meet your objectives.