SPLIT RETIREMENT ACCOUNTS WITH QDROs

A retirement plan might be a couple’s most valuable possession. Despite this, retirement plans are frequently neglected or disregarded after divorce, in part because divorce is so difficult, and in part because divorce can occur years before retirement. Who wants to worry about retirement when it’s 10 or 20 years away? People going through divorce can overlook a large amount of the marital assets if they don’t have the appropriate sort of court order, putting themselves at danger of financial instability in retirement. When it comes to split retirement accounts with QDROs, you need an experienced Colorado divorce attorney.

At Litvak Litvak Mehrtens and Carlton, P.C., we handle all sorts of divorce cases across the state of Colorado. From alimony in Colorado to Colorado child custody cases, we’ve seen it all. Our experience lies in the years we’ve spent helping our clients secure better positions in their divorce cases. Those undergoing a Colorado high asset divorce need an attorney who can handle a large volume of information. At Litvak Litvak Mehrtens and Carlton, we can deliver. For more information about split retirement accounts with QDROs, or to schedule a consultation, please call our Denver office at 303-951-4506 today.

What is a QDRO and why should I care?

A qualified domestic relations order is a court order that allows a person to receive a portion of the retirement benefits earned by his or her former spouse through participation in an employer-sponsored retirement plan. QDROs are commonly produced during divorce proceedings, but they can also be filed years later.

The individual who earned the benefit is referred to as the “participant,” and the person who is selected to receive a portion of that benefit is referred to as the “alternate payee” in a QDRO. While the participant is alive, QDROs can give benefits to the alternate payee, as well as survivor benefits if the person dies.

The contrast between a domestic relations order and a qualified domestic relations order is critical. A domestic relations order can be issued by any Colorado family law court, but it only becomes qualified after it is approved by the plan.

It’s also worth noting that “QDRO” refers to domestic relations orders that have been approved by a private employer’s retirement plan, such as a corporation or a non-profit. This might be referred to by a different word in other sorts of programs. For example, federal government employees’ retirement plans refer to these court orders as a COAP once they’ve been approved (Court Order Acceptable for Processing).

Why Do I Need a QDRO?

A retirement payout may only be shared between former spouses if a split retirement accounts with QDROs is in place, according to federal law. This implies that even if the divorce order explicitly says that the retirement benefit should be split, a divorce judgment issued by a state court may not be sufficient. While it is occasionally feasible for the divorce decree to fulfill the standards for being recognized as a QDRO, in many cases, a retirement plan will require a QDRO that is not part of the divorce judgment.

It’s also possible that the member who received the benefit will remarry after the divorce and subsequently divorce that person, in which case that person will be able to file a QDRO with the plan on his or her own. Because the plan administrator received a prior order from the first spouse, the second QDRO cannot be denied. The issuing of the second order, however, will have no effect on payments previously paid under the first order.

The Unfortunate News About QDROs:

Many clients have told us that they feel they are entitled to a part of a former spouse’s retirement benefit since it was included in the divorce judgment. Unfortunately, we must inform these customers that they have no entitlement to a benefit unless the retirement plan has a qualifying domestic relations order on file. Please keep in mind that if a divorce decree is finalized but does not address the participant’s retirement benefits, the former spouse has no rights to those benefits and cannot utilize the divorce decree to get a QDRO. 

After a divorce that does not address the retirement benefit in any manner, the only option to get a split retirement accounts with QDROs is to reopen the divorce, which will involve the services of a Colorado divorce attorney and can take years. As a result, it’s critical to ensure that your retirement plan is discussed during your divorce.

Is a QDRO the Only Way to Divide Retirement Plan Benefits?

In order to ensure that the correct entity is liable for paying any due taxes, proper handling is essential. The regulations that apply are determined by the type of retirement plan—whether it is an IRA or a qualified plan.

QDRO: Dividing a Qualified Plan

Divorce is one of the rare exceptions to the federal law’s safeguards for eligible retirement plans against seizure or attachment by creditors or litigation. If the ex-spouse of the plan owner utilizes a Qualified Domestic Relations Order, divorce and separation rulings allow the ex-spouse to attach qualified-plan assets. This decree divides the assets of a qualified retirement plan between the owner and his or her current or former spouse, children, or other dependents.

QDROs are similar to divorce-related transfers in that they are tax-free transactions as long as they are properly disclosed to the courts and IRA custodians. QDRO assets may be rolled into the recipient spouse’s own qualified plan or into a conventional or Roth IRA (in which case the transfer will be taxed as a conversion but not penalized). Any transfer from a qualified plan made as part of a divorce settlement that the IRS does not consider a QDRO is subject to tax and penalty.

Transfer Incident: Dividing an IRA

If you stated in your divorce agreement that your IRA divide should be considered as a transfer incident to divorce, there will be no tax due on the separation transaction. Depending on the conditions of the partition and how the decree is phrased, the IRA custodian may classify the funds movement as a transfer or a rollover.

When the transfer is complete, the receiver will become the legal owner of the assets and will be solely responsible for the tax consequences of any future transactions or distributions. This implies that if you donate half of your IRA to your soon-to-be-ex-spouse in the form of a properly documented transfer transaction, they will be responsible for paying taxes on any distributions they make from the account after they get the cash. Because you followed the IRS regulations for transfer events, you will not owe tax on the assets that were delivered to them.

Is a QDRO Needed for All Types of Retirement Plans?

Instructions for dealing with QDROs must be included in all retirement plans. If you’re divorcing, talk to the administrator of your retirement plan about the paperwork you’ll need to complete and other actions you’ll need to do.

Your plan administrator may provide you with a standard form that you may fill out on your own, which is free and simple. It is not, however, necessary to use one of these example forms to achieve QDRO status. A Denver divorce attorney may also prepare a QDRO on your behalf, which may be worth the extra cost if it ensures that the order is completed appropriately.

The document must include the plan participant’s and alternate payee’s names and postal addresses, the name of each plan covered by the QDRO, the monetary value or percentage of plan assets going to the alternate payee, the number of installments included in the order, and the order’s duration.

What Retirement Accounts Require a QDRO?

A QDRO is useful because, in the event of a divorce, the retirement plan administrator cannot immediately split the participant’s money to compensate the former spouse. Depending on the type of retirement plan, however, different criteria may apply for dividing the assets. Individual retirement accounts (IRAs) are handled through a procedure known as “transfer incident to divorce,” whereas 403(b)s and qualifying plans, such as 401(k)s, are handled through QDROs.

How Is Property Divided in a Divorce in Colorado?

In a divorce, Colorado is not a community property state. If couples cannot come to an agreement on their own, Colorado is an equitable distribution state, which means property will be split by the court in a way that is judged fair to both parties, but not necessarily equal. Colorado is also a dual-property state, which implies that property can be either marital or nonmarital in nature.