QDRO stands for Qualified Domestic Relations Order. This court issued order requires a pension plan administrator to give a specific amount of an employee’s pension to his or her former spouse after a divorce settlement. Before discussing details, let’s set some background.
In most cases, the most important assets in a divorce process are 401(k)s, pensions, and other certified retirement plans. It is absolutely necessary that a proper QDRO be drawn up correctly to ensure that the interest of both parties are protected. If not drafted and handled in the right way, a spouse who has become legally entitled to share the money in his or her former spouse’s retirement plan(s) may be deprived of its benefits.
QDRO Explained With An Emphasis on 401 (k) Plans
Many Colorado couples who have gone through a divorce would agree that the proceedings can put a great strain on emotions as well as creating a large dent to their finances. There are certain steps that people can take to shield themselves from financial losses during the divorce process. One of these steps is using a QDRO when dividing a 401(K) or other retirement funds. However, one of the most unclear, bewildering and often hard to understand aspects of a divorce proceeding is connected with QDROs.
As mentioned before, QDRO is an acronym that stands for Qualified Domestic Relations Order, requiring a pension plan administrator to distribute a specific amount of an employee’s pension to his or her former spouse after the divorce settlement. Stated more simply, it makes one spouse legally possible to receive money straight from his or her spouse’s 401(k) account.
Due to its complex nature, this legal document should be carefully drawn up by a qualified lawyer who is highly-skilled in retirement account divisions and approved by the judge assigned to the case. A QDRO can help couples avoid one of many financial pitfalls when dividing a 401(k) in divorce.
With the approval of the designated pension plan administrator, the benefits from the ex-spouse’s plan may be disbursed. A signed Colorado QDRO is still required even if the divorcing couple agrees to voluntarily divide the retirement money.
Benefits of a Qualified Domestic Relations Order
The U.S. Department of Labor states that a QDRO helps account holders avoid fees and taxes normally associated with early withdrawals. In most cases, a 401(k) account holder is assessed these penalties if they take out money obefore age 59 ½. The account holder should be exempt from tax since the money is paid to his or her spouse. The recipient can also bypass taxes by putting the money in another retirement fund account.
What Are the Other Uses For a QDRO?
A Colorado QDRO also gives an ex-spouse the right to collect payments for spouse and child support. It allows pension funds to be paid to a spouse, an ex-spouse, a child, or another dependent. If a court orders one spouse to make these payments for spousal maintenance and child support, a QDRO can let them draw from their pension funds to fulfill these responsibilities.
It is vital that a Qualified Domestic Relations Order be drafted and then implemented in the shortest possible time. If a QDRO gets delayed in filing and approval by the retirement plan administrator, the ex-spouse could end up without any benefits in the event the plan holder quits, retires, terminates the plan, or dies before the QDRO is executed.
Using a Model QDRO
A model or template based QDRO come with some pension or retirement plans. A few of these models are created as a protection for plan holders while others are created to facilitate the transfer of the plan. Unfortunately, using a model QDRO can cause more harm than good without having legal knowledge or experience due of its complicated nature and uncertain implications. An error in the model’s wording or terminology can equate to thousands of dollars lost in pension payments.
Concerning Individual Retirement Accounts (IRAs)
A Qualified Domestic Relations Order is not required for Individual Retirement Accounts or IRAs, according to federal law. In some cases, however, a financial institution will not release any IRA funds if there is no QDRO present. Since financial institutions firmly comply with strict guidelines, their legal department may prohibit the release of funds. To bypass this issue, the best solution is to come up with a proper QDRO.
When dividing marital property, the fair division of retirement plans is part of the divorce process. To get the most benefits out of your retirement funds, make sure your QDRO is drafted by a licensed and experienced legal professional. Call Goldman Law today by calling (303) 656-9529.