If you are going through a divorce and splitting assets, you are probably focusing on the most apparent items, such as your house, car, bank accounts. But, have you thought about your retirement plans, such as 401(k)s, IRAs and pensions? If a spouse acquired any of these items during the marriage, then it is considered “marital property” in Illinois and is to be divided equitably. That is where a QDRO comes in.
What is a QDRO?
QDRO (typically pronounced “quadro”) stands for Qualified Domestic Relations Order and is a legal document that divides a retirement plan between two spouses at the time of divorce. It is a separate document from a marital settlement agreement.
In Pennsylvania, retirement plans acquired by a spouse during the marriage are considered “marital property” and are to be divided equitably. This means that if any of portion of the retirement plan was acquired before the marriage, that portion is likely to be considered separate property and can be retained by the spouse who acquired it before the marriage.
What a QDRO does is direct the retirement plan administrator to create two separate accounts (one for each spouse) with the ‘gaining’ spouse having complete control over their new account with the same rights to the account as the former spouse has to their own.
Then, the retirement plan assets are divided. Assets with known values, such as a 401(k) plan are easier to divide whereas a pension – which has a value in the future like $1000 per month starting at age 65 – is not as easy to divide and may require the retention of an expert.
When should you draft and sign the QDRO?
It is highly recommended that you have the QDRO drafted and signed by the judge at the time of the divorce. This may require extra work on the part of your attorney, including calling in financial and accounting experts but it is the recommended course of action.
Oftentimes a marital settlement agreement will state that the retirement plan is to be “divided equally” but there is no accompanying QDRO outlining the specifics. The problem with this is that after the divorce is finalized and a QDRO is then prepared, you run the risk of learning that some of your retirement assets are the type that cannot be split. This changes the dynamics and possibly what you would have agreed to in the divorce. It is best to address these issues at the time of the divorce before it is too late. So, finalizing the QDRO post-divorce only racks up further attorneys’ fees and the possibility of retirement plan assets not being divided properly.
Is a QDRO my only option?
A QDRO is not the only mechanism for splitting retirement plan assets. Instead of drafting a QDRO, you can value the retirement plan assets and then the spouse without the retirement account can have property of the same value, such as real estate, investments or other assets, to compensate him or her. This is called the “offset” option.
The above options may sound extremely simple but they are not. Valuing assets, particularly those in a retirement plan, can be a complicated endeavor with a number of factors to consider, such as future value, fees and penalties, etc.
Whichever option is ultimately right for you can only be determined by careful consultation with your attorney and accountant. A QDRO must be carefully drafted to cover all possible future scenarios, such as death before retirement age, for instance. It is worth the time and effort now so that you are not left undercompensated in the future.
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